NOT FOR QUOTATION WITHOUT PERMISSION OF THE AUTHOR

THE TREATMENT OF INTERNATIONAL TRADE IN GLOBAL MODELS

Andras Nagy

February 1983 WP-83-25

Working Papers are interim reports on work of the International Institute for Applied Systems Analysis and have received only limited review. Views or opinions expressed herein do not necessarily repre- sent those of the Institute or of its National Member Organizations.

INTERNATIONAL INSTITUTE FOR APPLIED SYSTEMS ANALYSIS A-2361 Laxenburg, Austria

ABSTRACT

This paper i s a c r i t i c a l survey of t h e t r ea tmen t of i n t e r - n a t i o n a l t r a d e i n g l o b a l models, concen t r a t i ng on what-in t h e a u t h o r ' s opinion- is wrong wi th it.

A f t e r a b r i e f review and c l a s s i f i c a t i o n of t h e d i f f e r e n t ways i n which i n t e r n a t i o n a l t r a d e r e l a t i o n s a r e t r e a t e d i n g l o b a l models, t h e n e g l e c t of b i l a t e r a l t r a d e r e l a t i o n s i s c r i t i c i s e d on t h e grounds t h a t it assumes more freedom i n t r a d i n g r e l a t i o n s t han t h e r e a c t u a l l y i s . I n t h e nex t s e c t i o n t h e common assump- t i o n t h a t t r a d e i s demand-determinedisquestioned; it i s argued t h a t t h e e x p o r t e r s ' "push" i s a t l e a s t a s important a s t h e i m - p o r t e r s ' " p u l l " i n determining b i l a t e r a l t r a d e f lows. Sec t ion 5 r a i s e s t h e ques t ion : do t r a d e ba lances approach ze ro i n t h e long run , a s many p o l i c y makers and model b u i l d e r s seem t o be- l i e v e ? The au thor sugges t s t h a t t h e r e i s ha rd ly any b a s i s f o r t h i s b e l i e f .

The r o l e o f r e l a t i v e p r i c e s i s d i s c u s s e d i n t h e nex t s e c t i o n , where it i s shown t h a t t hey provide no exp lana t ion of changes i n market s h a r e s , and t h a t expor t p r i c e s cannot be assumed t o move i n p a r a l l e l w i th c o s t changes i n d i f f e r e n t c o u n t r i e s . Sec t ion 7 draws a t t e n t i o n t o t h e r e l a t i v e lack and u n r e l i a b i l i t y of f o r e i g n t r a d e p r i c e d a t a : t h e " u n i t va lues" which can be observed t e l l u s l i t t l e about p r i c e s and it i s hard t o conver t t h e domestic p r i c e s t a t i s t i c s i n t o comparable n a t i o n a l expor t p r i c e i n d i c e s .

The f i n a l s e c t i o n of t h e paper d i s c u s s e s d i f f e r e n t ways i n which t h e s t r u c t u r e of an i n t e r n a t i o n a l t r a d e system can be de- f i n e d , and p r e s e n t s a method by which t h e e f f e c t s o f t r a d e p o l i c y and economic d i s t a n c e can be measured independent ly of changes i n t h e vo lumeofwor ld t r a d e and t h e changing s h a r e s of d i f f e r e n t c o u n t r i e s i n world t r a d e . The use fu lnes s of t h i s k ind of analy- s is i n d e m o n s t r a t i n g t h e h i s t o r i c a l e f f e c t s of t r a d e p o l i c i e s i s i l l u s t r a t e d by means of some simple examples.

CONTENTS

INTRODUCTION

1 . TREATMENT OF TRADE I N GLOBAL MODELS

2 . OPEN-ENDED OR CLOSED MODELS

3 . NEGLECTING BILATERAL R E L A T I O N S H I P S

4 . DEMAND-DETERMINED OR PUSH-AND-PULL MODELS

5 . DO TRADE BALANCES APPROACH ZERO?

6 . THE ROLE OF P R I C E S

7 . THE OBSERVATION OF P R I C E S

8 . THE STRUCTURE OF INTERNATIONAL TRADE AND THE ROLE OF TRADE P O L I C Y AND DISTANCE

REFERENCES

THE TREATMENT OF INTERNATIONAL TRADE IN GLOBAL MODELS

INTRODUCTION

Why is the analysis of trade usually the weakest point of

national planning models? This question, by now familiar to

economic modelers, cannot be answered by looking at international

trade from the narrow and biased viewpoint of a single country;

it is necessary to recognize international trade as a complex

system with a certain defined structure which evolves over time

in response to particular stimuli. How can this structure be

characterized and what are the forces promoting and resisting

change? To answer this question we have undertaken a study of

structural change in international trade, with the hope of using

our findings to forecast its behavior and analyze possible scen-

arios for the future.

Our approach to the study of structural change in interna-

tional trade differs significantly from the paths taken by many

global-model builders; work has continued in parallel with little

contact between the various schools of thought. This paper is

an attempt to provide a critical survey of the treatment of in-

ternational trade in global models,concentrating on what-in

the author's opinion-is wrong with it. It is deliberately pro-

vocative: it is high time for a frank discussion of important

issues such as the factors determining trade (what are they?),

t h e r o l e o f p r i c e s , t h e long-run behav io r of t r a d e b a l a n c e s ,

t h e i n f l u e n c e of t r a d e p o l i c i e s , and t h e measurement of t h e i r

e f f e c t s . I hope t h a t a d i s c u s s i o n of t h e s e i s s u e s w i l l n o t

o n l y improve t h e s p i r i t i n which t h e f i n a l v e r s i o n o f t h i s p a p e r

i s r e c e i v e d , b u t w i l l a l s o c o n t r i b u t e t o t h e development of

b e t t e r g l o b a l models.

A s h o r t p a p e r c a n n o t p o s s i b l y g i v e an e x h a u s t i v e s u r v e y of

g l o b a l models , and s o I have t r i e d t o c o n c e n t r a t e on g e n e r a l

problems i n t h e t r e a t m e n t of t r a d e , r a t h e r t h a n on d e t a i l e d de-

s c r i p t i o n s of s p e c i f i c models (which can i n any c a s e be found

e l s e w h e r e ) .

The a u t h o r i s f u l l y aware t h a t t h i s p a p e r i s more o f a

d i a g n o s i s t h a n a p r e s c r i p t i o n ; b u t b e f o r e recommending a c u r e

t h e w i s e d o c t o r f i r s t e s t a b l i s h e s t h e e x i s t e n c e and n a t u r e of

t h e compla in t . Only when t h e r e i s f u l l agreement on what i s

wrong i s it p o s s i b l e t o t r y t o p u t it r i g h t .

1 . TREATMENT OF TRADE I N GLOBAL MODELS

W e s h a l l s t a r t by c a t e g o r i z i n g t h e t r e a t m e n t o f t r a d e i n

g l o b a l models*. F i g u r e 1 shows a s i t u a t i o n i n which b o t h

n a t i o n a l economies and i n t e r n a t i o n a l t r a d e a r e n e g l e c t e d , and

g l o b a l q u e s t i o n s such a s how t h e f u t u r e needs of humanity can

be m e t by t h e a v a i l a b l e r e s o u r c e s ( e n e r g y , l a n d , w a t e r , m i n e r a l s ,

e t c . ) a r e c o n s i d e r e d , i r r e s p e c t i v e of n a t i o n a l b o u n d a r i e s . I t

c a n be a r g u e d , o f c o u r s e , t h a t b o t h t h e n a t i o n a l economies and

t h e economic r e l a t i o n s between them a r e a r t i f i c i a l , i . e . , t h e y

w e r e c r e a t e d by man and c a n e q u a l l y w e l l be changed by him. It

i s a l s o open t o q u e s t i o n whether t h e f a c t t h a t t h e p e r s o n s o r

f i r m s p roduc ing and consuming goods a r e r e g i s t e r e d i n d i f f e r e n t

c o u n t r i e s and t h a t some o f t h e t r a n s a c t i o n s c r o s s p o l i t i c a l

b o u n d a r i e s i s economica l ly r e l e v a n t * * and needs t o be t a k e n i n t o

c o n s i d e r a t i o n .

W e s h a l l a s s e r t , ' w i t h o u t going i n t o d e t a i l s , t h a t n a t i o n a l

i n s t i t u t i o n s , l e g i s l a t i o n , s o c i a l and p o l i t i c a l c o n d i t i o n s a r e

s o d i f f e r e n t and s o i m p o r t a n t t h a t i f we d i d n o t t a k e them i n t o

*Fol lowing P a r i k h and Rabar (1981:8-15) up t o a p o i n t . **See Haberer (1936:2-9) .

account t h e answers w e would g e t f o r q u e s t i o n s s u c h a s t h o s e men-

t i o n e d above would be i r r e l e v a n t . I t i s h a r d l y r e a s s u r i n g t o

know, f o r e x a m p l e t t h a t t h e r e w i l l t h e o r e t i c a l l y be enough l a n d ,

w a t e r , and energy r e s o u r c e s t o s u p p o r t t h e r a p i d l y i n c r e a s i n g

human p o p u l a t i o n 50 o r 100 y e a r s from now, i f m i l l i o n s of them

w i l l n e v e r t h e l e s s d i e , s t a r v e o r f r e e z e i n t h e f u t u r e a s a re-

s u l t o f " n e g l e c t e d " n a t i o n a l o r i n t e r n a t i o n a l t r a d e c o n s t r a i n t s .

F i g u r e 2 shows t h e c a s e i n which t h e n a t i o n a l economy ( o r

a p a r t o f it) is t h e f o c u s o f a t t e n t i o n . Most n a t i o n a l p l a n n i n g

and f o r e c a s t i n g models a r e based on t h i s r e p r e s e n t a t i o n , i n

which t h e i n t e r n a t i o n a l envi ronment i s t r e a t e d a s a l a r g e b l a c k

box where e v e r y t h i n g can be bought and s o l d . The sad f a c t i s

t h a t i n d i v i d u a l n a t i o n a l p l a n s o r p r o j e c t i o n s of f o r e i g n t r a d e

a r e n e c e s s a r i l y i n c o n s i s t e n t w i t h e a c h o t h e r * , i . e . , t h e es t i -

mated e x p o r t s of c o u n t r y i t o c o u n t r y j a r e v e r y u n l i k e l y t o b e

e q u a l t o t h e e s t i m a t e d i m p o r t s o f c o u n t r y j from c o u n t r y i. I t

i s enough pe rhaps t o remind t h e r e a d e r of t h e s i m p l e f a c t t h a t

many c o u n t r i e s a r e w i l l i n g t o i n c r e a s e t h e e x p o r t of e n g i n e e r i n g

goods and c u r b t h e impor t o f t h e same goods , w h i l e i n c r e a s i n g

t h e impor t and r e s t r i c t i n g t h e e x p o r t of raw m a t e r i a l s . I f t h i s

i s t h e c a s e , e x p o r t e r s o f e n g i n e e r i n g goods c a n n o t s e l l a l l t h a t

t h e y would wish ( p l a n or p r o j e c t ) , no r can t h e f o r e i g n demand

f o r impor ted raw m a t e r i a l s be s a t i s f i e d .

One of t h e c h a r a c t e r i s t i c s of f o r e i g n t r a d e i s t h a t t h e

n a t i o n a l e s t i m a t e s a r e n o t a d d i t i v e a s i s t h e c a s e f o r demand

o r supp ly . The demand f o r food o r s tee l i n t h e i n d i v i d u a l coun-

t r i e s c a n be added t o g e t h e r t o g e t t h e t o t a l world demand; t h i s

i s n o t p o s s i b l e i n t r a d e . The i n t e r e s t s o f e x p o r t e r s and i m -

p o r t e r s a r e opposed: t h e t r a n s a c t i o n is a compromise b rough t

a b o u t by b a r g a i n i n g and i s u s u a l l y n o t what e i t h e r o f t h e two

p a r t i e s would have p r e f e r r e d .

F i g u r e 3 shows t h e approach adop ted by some t r a d e models ,

i n which t h e n a t i o n a l economies a r e r e g a r d e d a s b l a c k boxes and

t h e f o c u s i s on b i l a t e r a l t r a d e f lows**. N e g l e c t i n g what i s

*See Nagy (1979:11-23). The number o f n a t i o n a l p l a n s and f o r e c a s t s f a l l i n g i n t o t h i s c a t e g o r y i s s o g r e a t t h a t it seems s u p e r f l u o u s t o g i v e r e f e r e n c e s h e r e .

**See, f o r example, Marin-Curtoud (1 9 6 5 ) , ECE (1971a, 1 9 7 3 ) , Linnemann (1 9 6 6 ) , Nagy (1 977, 3979, 1 9 8 2 ) .

Vsaxoq y a e ~ q a x e saTmouoaa IeuoTqeu axayfi

sTapom apexJ - c a x n b r ~

'xoq y=-eTq e se a p e x 3 pue sarmouoaa Teuorqeu yqoa ' 1 a x n b r j

happening w i t h i n t h e n a t i o n a l economies and how t h e s e economies

r e a c t t o changes i n t h e world market i s obviously very u n s a t i s -

f a c t o r y , bu t t h e s e models can n e v e r t h e l e s s he lp u s t o g a i n a

b e t t e r unders tanding of t h e s t r u c t u r a l c h a r a c t e r i s t i c s , t h e r i g -

i d i t i e s and f l e x i b i l i t i e s of t h e i n t e r n a t i o n a l t r a d i n g system

and t h e f o r c e s working wi th in it . The main reason f o r develop-

i n g such models was t o draw a t t e n t i o n t o t h e importance of

b i l a t e r a l t r a d e f lows i n g l o b a l modeling and t o g e t a b e t t e r

unders tanding of t h e f o r c e s working w i t h i n t h e t r a d e system.

F igu re 4 shows t h e so-ca l led "pool" approach, i n which in -

t e r n a t i o n a l t r a d e i s aga in t r e a t e d a s a black box b u t , u n l i k e

F igure 2 , t o t a l e x p o r t s equa l t o t a l imports f o r each commodity

cons idered i n t h e model*. The i n t e r n a l s t r u c t u r e of t h e t r a d i n g

system, r ep re sen ted by t h e b i l a t e r a l f l ows , i s no t inc luded i n

t h i s type of model; i n s t e a d t h e n a t i o n a l economies ( o r t h e i r

branches) a r e l i nked through a "pool" of world t r a d e . A l l ex-

p o r t s flow i n t o t h i s poo l and a l l imports f low o u t of it such

t h a t t h e volumes of t h e s e two f lows a r e equa l i n each t ime

pe r iod . This kind of approach can e a s i l y be adapted t o a gen-

e r a l equ i l i b r ium framework. I n t h i s c a s e t h e t o t a l e x p o r t sup-

p ly and import demand determine a unique world market p r i c e

which i s r epo r t ed t o t h e n a t i o n a l economies; t hey then modify

t h e i r e x p o r t and import e s t i m a t e s acco rd ing ly , and t h e i t e r a t i o n

i s cont inued u n t i l a s t e a d y - s t a t e s o l u t i o n i s reached. The main

weakness of t h i s approach i s t h a t by n e g l e c t i n g t h e t r a d e s t r u c -

t u r e it assumes a much g r e a t e r degree of freedom than a c t u a l l y

e x i s t s i n t h e r e a l world (we come back t o t h i s q u e s t i o n aga in

on p.9 1 .

The domestic and e x t e r n a l r e l a t i o n s h i p s e x i s t i n g w i t h i n

t h e g l o b a l system ( e i t h e r f o r t h e economy a s a whole o r f o r some

branches of i t) a r e shown i n F igu re 5. Here t h e n a t i o n a l models

a r e l i nked t o each o t h e r through b i l a t e r a l f lows and t h e r e i s

no black box i n t h e system. The models developed by t h e L I N K

P ro j ec t** , t h e INFORUM group***, t h e FUGI P r o j e c t ? and t h e t r a d e

*See, f o r example, Leont ief ( 1 977) , Costa ( 1 980) . **Bal l (1973) .

***Nyhus (1975) , Almon and Nyhus (1977, 1979) . ?Kaya e t a l . (1977, 1980) .

model of t h e INTERFUTURES P r o j e c t * f a l l i n t o t h i s c a t e ~ o r y . [The

Food and Agr i cu l tu re Program of I I A S A , d e s p i t e s t a t e m e n t s t o t h e

c o n t r a r y i n Par ikh and Rabar (1981) , u t i l i z e s t h e "pool" system

of l inkage** shown i n F igure 4 . 1 I n such a model, domestic

economic a c t i v i t y and e x t e r n a l t r a d e a r e i n t e g r a t e d and t h e i r

i n t e r a c t i o n can be s imula ted a t a l e v e l of d e t a i l which depends

on t h e degree of commodity d i sagg rega t ion .

The r e s t of t h i s paper c o n c e n t r a t e s on t h e c a s e s i l l u s t r a t e d

i n F igu res 3, 4 , and 5 .

2 . OPEN-ENDED OR CLOSED MODELS

I n t e r n a t i o n a l models which keep t h e balance of t r a d e i n

equ i l i b r ium a r e of two k inds : s e c t o r a l t r a d e models, o r t o t a l

t r a d e models. The Leont ief Model, f o r example, belongs t o t h e

second ca t ego ry , whi le models d e a l i n g wi th c e r t a i n commodity

groups such a s food o r energy belong t o t h e f i r s t . T o t a l ex-

p o r t s have t o be e q u a l t o t o t a l imports i n bo th c a s e s , which

means t h a t t h e expor t and import s u r p l u s e s have t o cance l each

o t h e r o u t .

The impor tan t d i f f e r e n c e , however, i s t h a t i n a model which

inc ludes a l l c l a s s e s of commodities we can fo l low t h e e x t e n t t o

which t h e import s u r p l u s e s of c e r t a i n r eg ions i n food o r energy

e t c . , a r e covered by o t h e r commodities. I n t h e models concen-

t r a t i n g on only one commodity group t h i s i s n o t p o s s i b l e . I t

may be r e a s s u r i n g t o know, f o r example, t h a t t h e t o t a l energy

demand of t h e world can be met by t h e expor t s of a l i m i t e d num-

b e r of r e g i o n s , bu t it i s unc lea r by what commodities t h e s e i m -

p o r t s u r p l u s e s w i l l be covered i n t h e n e t energy-importing coun-

t r i e s . I n c e r t a i n models t h i s problem of cons i s t ency i s "solved"

by in t roduc ing an a d d i t i o n a l commodity group c a l l e d " o t h e r com-

mod i t i e s " , t h e t r a d e i n which can balance o u t t h e expor t o r i m -

p o r t s u r p l u s e s of t h e r eg ions . Needless t o s ay , t h i s can h a r d l y

be regarded a s a s a t i s f a c t o r y s o l u t i o n , e s p e c i a l l y i f t h e s e

"o the r " commodities r e p r e s e n t some 80-90 p e r c e n t of t h e t o t a l

t r a d e . I t would be b e t t e r , perhaps , t o admit t h a t whi le it i s

* I n t e r f u t u r e s (1 9 7 9 ) . **See Keyzer ( 1 981) .

t e c h n i c a l l y p o s s i b l e t o m e e t t h e demand o f n e t i m p o r t i n g r e g i o n s

w i t h t h e e x p o r t s u r p l u s of o t h e r r e g i o n s , w e d o n o t know how

t h i s can be f i n a n c e d ( i . e . , covered by t h e e x p o r t s u r p l u s e s i n

o t h e r commodit ies o r by l o a n s o r a i d ) .

NEGLECTING BILATERAL RELATIONSHIPS

Models u s i n g t h e " t r a d e p o o l " method, which n e g l e c t s t h e

c h a r a c t e r i s t i c s and r i g i d i t i e s of b i l a t e r a l r e l a t i o n s h i p s , a s -

sume t h a t t h e t r a d i n g r e l a t i o n s h i p i s much f r e e r t h a n i t a c t u -

a l l y is . The o n l y c o n s t r a i n t ( t h a t t o t a l e x p o r t s must e q u a l

t o t a l i m p o r t s i n e a c h commodity group) assumes t h a t t r a d e among

c o u n t r i e s i s f a r f r e e r t h a n any " f r e e - t r a d e r " h a s e v e r dreamt

o f , d i s r e g a r d i n g p a s t p a t t e r n s , t r a d i t i o n s , p o l i t i c a l l i n k s ,

t r a n s p o r t a t i o n c o s t s , t a r i f f s , s u b s i d i e s , t r a d i n g p o l i c i e s , e t c .

T h i s h idden f e a t u r e c a n be v e r y m i s l e a d i n g i n d e e d . N a t i o n a l

p o l i c y makers u s i n g such f o r e c a s t s o r p l a n n e r s who a r e t a r g e t -

o r i e n t e d and u s u a l l y t e n d t o be o p t i m i s t i c a r e p l e a s e d t o e m -

b r a c e such i n c r e a s e d freedom and can e v e n t u a l l y be d e c e i v e d by

it.

Le t u s show, u s i n g a v e r y s imple example, why b i l a t e r a l re-

l a t i o n s h i p s canno t be n e g l e c t e d and t h e z e r o t o t a l t r a d e b a l a n c e

c o n s t r a i n t f o r each commodity i s n o t s u f f i c i e n t i n c e r t a i n s i t u -

a t i o n s . Four c a s e s o f b i l a t e r a l t r a d e between c o u n t r i e s A , B ,

and C a r e shown i n Tab le 1 , where t h e rows r e p r e s e n t t h e d i s t r i -

b u t i o n o f e x p o r t s between impor t m a r k e t s and t h e columns t h e

s u p p l y of i m p o r t s by v a r i o u s e x p o r t e r s . I n Case 1, t r a d e i s

d i s t r i b u t e d e q u a l l y among t h e marke t s and a l l t r a d e b a l a n c e s a r e

z e r o . What would happen i f o v e r a c e r t a i n p e r i o d of t i m e t h e

t r a d e of c o u n t r y A i n c r e a s e s by 100 p e r c e n t and w e want t o keep

t h e t r a d e b a l a n c e s o f a l l t h r e e c o u n t r i e s i n e q u i l i b r i u m ? I n

t h i s c a s e t h e t r a d e o f c o u n t r i e s B and C e i t h e r h a s t o i n c r e a s e

by a t l e a s t 50 p e r c e n t , when t h e y c a n keep t h e i r t r a d e between

e a c h o t h e r a t t h e p r e v i o u s l e v e l (Case 2 ) , o r t h e i r i n t e r n a l

t r a d e h a s t o d i m i n i s h o r d i s a p p e a r comple te ly a s i n Case 3 . I f ,

however, it is n o t p o s s i b l e t o i n c r e a s e t h e e x p o r t s of c o u n t r i e s

B and C by more t h a n 20 p e r c e n t and t h e y canno t r educe t h e i r b i -

l a t e r a l t r a d e , t h e o n l y way c o u n t r y A can doub le i t s e x p o r t s i s

by hav ing a n e x p o r t s u r p l u s of 6 u n i t s , w h i l e e a c h of t h e o t h e r

two c o u n t r i e s h a s a d e f i c i t of 3 u n i t s (Case 4 ) .

Table 1. Trade f lows among t h r e e c o u n t r i e s .

Impor t ing c o u n t r i e s Expor t ing T o t a l Trade c o u n t r i e s A B C e x p o r t s b a l a n c e

Case 1 A 0 5 5 10 0

T o t a l i m p o r t s 10 10 10 3 0 0

Case 2 A 0 10 10 2 0 0

T o t a l i m p o r t s 20 1 5 1 5 50 0

Case 3 A 0 10 10 2 0 0

T o t a l i m p o r t s 20 10 10 40 0

Case 4 A

B

C

T o t a l impor t s 1 4 15 15 4 4 0

I t i s ev iden t t h a t t h e d ive rgen t growth of t r a d e i n d i f f e r -

e n t c o u n t r i e s i s f e a s i b l e on ly i f we e i t h e r a l l o w g r e a t s t r u c t u r a l

changes i n t h e t r a d i n g p a t t e r n , o r a c e r t a i n freedom of movement

i n t h e t r a d e ba lances ( o r b o t h ) . Keeping t o t a l e x p o r t s and i m -

p o r t s equa l by commodities i s by no means a guaran tee t h a t t h e

d i f f e r e n c e s i n t h e expor t and import growth r a t e s w i l l produce

a f e a s i b l e s o l u t i o n a s f a r a s t h e b i l a t e r a l t r a d e s t r u c t u r e and

t h e n a t i o n a l ba lances of t r a d e a r e concerned.

A s t h e number of t r a d i n g c o u n t r i e s o r r eg ions cons idered

i n c r e a s e s , t h e number of degrees of freedom a l s o i n c r e a s e s . I n

t h e g e n e r a l c a s e we have n2 t r a d e f lows i f t h e r e a r e n r eg ions

i n t h e model, o r n2-n f lows i f we a r e cons ide r ing i n d i v i d u a l

c o u n t r i e s . ( A r eg ion i s regarded here a s a group of c o u n t r i e s . )

We have t h e fo l lowing c o n s t r a i n t s * :

Consequently, t h e r e a r e n2 - (3n + 1 ) degrees of freedom f o r a 2 r e g i o n a l t r a d e model and (n - n) - (4n + 1 ) f o r a model based

on t r a d e between i n d i v i d u a l c o u n t r i e s . I t i s c l e a r from t h e s e

equa t ions t h a t t h e number of degrees of freedom i s p o s i t i v e f o r

fou r o r more r eg ions and f o r s i x o r more c o u n t r i e s . Ten r eg ions

seems t o be s u f f i c i e n t f o r f o r e c a s t i n g purposes , bu t t h i s i s

f a r from c e r t a i n .

* In t h e c a s e of r e g i o n s t h e m a t r i x d iagona l r e p r e s e n t s i n t r a - r e g i o n a l t r a d e , whi le f o r c o u n t r i e s t h e d iagona l c e l l s a r e empty. C o n s t r a i n t (3 ) comes i n t o e f f e c t only f o r c o u n t r i e s .

The q u e s t i o n s t o be c o n s i d e r e d a r e how much t h e growth of

e x p o r t s and i m p o r t s of t h e d i f f e r e n t r e g i o n s w i l l d i v e r g e , which

r i g i d i t i e s i n b i l a t e r a l t r a d e r e l a t i o n s w e have t o t a k e i n t o ac-

c o u n t and how i n f l e x i b l e t h e s e r i g i d i t i e s a c t u a l l y a r e . The

problem w i t h t r e a t i n g b i l a t e r a l t r a d e r e l a t i o n s a s a b l a c k box

and c o n s i d e r i n g o n l y t h e a c c o u n t i n g i d e n t i t y of t o t a l e x p o r t s

and t o t a l i m p o r t s i n each commodity g roup i s t h a t s t r u c t u r a l

change i n i n t e r n a t i o n a l t r a d e r e l a t i o n s a p p e a r s t o be much e a s i e r

t h a n it a c t u a l l y i s ; c o n s e q u e n t l y it i s n o t c l e a r whether a g i v e n

r e s u l t i s r e a l l y f e a s i b l e o r n o t .

4 . DEMAND-DETERMINED OR PUSH-AND-PULL MODELS

Most g l o b a l models which i n c l u d e i n t e r n a t i o n a l t r a d e a r e

demand-determined i n t h e s e n s e t h a t t h e y u s u a l l y s t a r t w i t h i m -

p o r t f o r e c a s t s based on domes t i c v a r i a b l e s f o r i n d i v i d u a l coun-

t r i e s o r r e g i o n s ; t h u s , e x p o r t s w i l l depend on t h e impor t demands * of o t h e r c o u n t r i e s . Then comes t h e d i f f i c u l t q u e s t i o n of which

e x p o r t e r s s h o u l d p r o v i d e which i m p o r t s and whether t h e s e e x p o r t

f o r e c a s t s a r e c o n s i s t e n t w i t h t h e p r o j e c t e d growth of t h e domes-

t i c economy. I f t h i s i s n o t t h e c a s e , t h e modeler u s u a l l y i n t r o -

duces an i t e r a t i v e p r o c e s s which e n s u r e s t h e c o n s i s t e n c y of

n a t i o n a l e x p o r t s and i m p o r t s w i t h i n t h e l i m i t s of t h e e s t i m a t e d

t r a d e b a l a n c e s .

But b e f o r e w e b e g i n a d i s c u s s i o n of who e x p o r t s what t o

where, w e s h o u l d p e r h a p s q u e s t i o n t h i s i m p l i c i t assumpt ion:

i s t h e demand f o r i m p o r t s by t h e n a t i o n a l economies r e a l l y t h e

d r i v i n g f o r c e o f i n t e r n a t i o n a l t r a d e ? T h i s a p p a r e n t l y seems s o

obv ious t o economic t h e o r e t i c i a n s and model b u i l d e r s t h a t i t

does n o t w a r r a n t any e x p l a n a t i o n o r p r o o f . However, t h e same

b e l i e f i s n o t h e l d by economis t s f a m i l i a r w i t h t r a d i n g p r a c t i c e s -

f o r them it i s e q u a l l y e v i d e n t t h a t t h e e f f o r t s of t h e e x p o r t e r s

( o r p r o d u c e r s ) t o s e l l i s a t l e a s t a s ( i f n o t more) i m p o r t a n t

i n e x p l a i n i n g t r a d e f lows a s t h e w i l l i n g n e s s o f i m p o r t e r s ( o r

consumers) t o buy. T h i s i s n o t q u i t e t r u e when s h o r t a g e s o c c u r

( f o r example, i n c e r t a i n t r a d e r e l a t i o n s between t h e s o c i a l i s t

*See, among o t h e r s , Rhornberg (1970, 1973) , ~ y h u s (19751, Waelbroeck ( 1 9 7 3 ) , Gupta e t a l . ( 1 9 7 9 ) , hish hi do ( 1 9 8 0 ) .

c o u n t r i e s ) , b u t i n t e r n a t i o n a l markets f o r most p roduc t s a r e usu-

a l l y n o t c h a r a c t e r i z e d by s h o r t a g e s , b u t r a t h e r by exces s supp ly

o r unused c a p a c i t y . Th i s i s t h e r ea son why e x p o r t e r s make more

e f f o r t t o s e l l (by a d v e r t i z i n g and a l l k i n d s o f marke t ing t e ch -

n i q u e s ) , t h a n impor t e r s do t o buy.

The t r a d i n g t r a n s a c t i o n i t s e l f i s obv ious ly t h e r e s u l t of

e f f o r t s made by bo th t h e e x p o r t e r and t h e i m p o r t e r , t h e former

"push ing" , i . e , , t r y i n g t o s e l l h i s goods a t t h e h i g h e s t p r i c e s ,

and t h e l a t t e r " p u l l i n g " i . e . , t r y i n g t o f i n d t h e s u p p l i e r o f f e r -

i n g goods a t t h e l owes t p r i c e s . Who "wins" , o r who g e t s more

o u t of t h e b a r g a i n depends t o a g r e a t e x t e n t on t h e c u r r e n t s t a t e

of t h e l o c a l market f o r t h e g iven p roduc t . However, one t h i n g

i s c e r t a i n : t r a n s a c t i o n s a r e n o t b rought abou t s o l e l y th rough

t h e demand " p u l l " of t h e impor t e r .

One way of measur ing t h i s push /pu l l e f f e c t (which i s b o t h

obse rvab l e and i n t u i t i v e ) i s t o look a t t h e r e s u l t s o b t a i n e d

u s ing g r a v i t a t i o n a l t r a d e models*. These models measure t h e

f a c t o r s i n f l u e n c i n g t r a d e f lows , assuming t h a t t h e s e f lows a r e

f u n c t i o n s of t h e t r a d i n g c a p a c i t i e s of t h e c o u n t r i e s concerned,

and t h e " r e s i s t a n c e " h i n d e r i n g o r " a t t r a c t i o n s " s t r e n g t h e n i n g

t r a d e r e l a t i o n s between them. Trad ing c a p a c i t i e s can be d e f i n e d

a s t h e p o t e n t i a l supp ly of goods by t h e e x p o r t i n g coun t ry and

t h e p o t e n t i a l demand f o r goods o f t h e impor t i ng coun t ry . I n

most g r a v i t a t i o n a l models of t o t a l t r a d e f lows ( i . e . , f lows ag-

g r ega t ed by commodity c l a s s e s ) , p o t e n t i a l supp ly and demand a r e

exp re s sed i n terms of t h e g r o s s domes t i c p roduc t (GDP) of t h e

two c o u n t r i e s and t h e i r p o p u l a t i o n , which r e p r e s e n t s t h e domes-

t i c c a p a c i t y t o ab so rb commodities and ha s a n e g a t i v e e f f e c t on

t r a d e f lows . * *

Without going i n t o t h e d e t a i l s of t h e s e mode l s , w e r epro-

duce h e r e a t a b l e comparing t h e r e s u l t s of d i f f e r e n t g r a v i t a -

t i o n a l model computa t ions (Tab le 2 ) . W e shou ld mention t h a t a l l

computa t ions r e v e a l e d s i g n i f i c a n t r e l a t i o n s h i p s between t h e t r a d e

f lows and t h e e x p l a n a t o r y v a r i a b l e s employed, even i f t h e

*See Tinbergen (1 962) , P u l l i a i n e n (1 963) , Linnemann (1 966) , Aitken (1973 ) , Nagy (1979 ) .

**Deta i l ed d e s c r i p t i o n s can be found i n Linnemann (1966) and Nagy ( 1 979 ) .

Table 2. Comparison of the estimated parameters of selected gravitational models.

GDP of t h e Populat ion of t h e

Export ing country Importing country Export ing Importing

Nominal Comparable Nominal Comparable count ry country Distance 1 2 3 4 5 6 7

TINBERGEN

1 8 c o u n t r i e s 1958 0.74 -

42 c o u n t r i e s 1959 1.00 - 0.91 - - - -0.78

42 c o u n t r i e s 1959 - 1.16

PULLIAINEN

62 c o u n t r i e s 1959 0.83 -

LINNEMANN

80 c o u n t r i e s 1958-1960 0.99 -

80 c o u n t r i e s 1958-1960 - 1.11

NAGY

27 c o u n t r i e s 19 60 - 1.03

AITKEN

12 c o u n t r i e s 1959 1.12 -

12 c o u n t r i e s 1967 1.05 - 0.91 - -0.33 -0.37 -0.35

-

c o r r e l a t i o n s were n o t ve ry s t r o n g . When p r e s e n t i n g t h e r e s u l t s ,

we s epa ra t ed t h e computat ions based on t h e nominal v a l u e s of

t h e GDP from t h o s e performed wi th "comparable" v a l u e s o f t h e

G D P , a l though t h e s e "comparable" v a l u e s were a c t u a l l y ob t a ined

i n a number of d i f f e r e n t ways.

The i n t e r e s t i n g f a c t h e r e i s t h a t t h e GDP paramete rs of t h e

e x p o r t i n g c o u n t r i e s a r e i n every c a s e h i g h e r t h a n t h o s e o f t h e

import ing c o u n t r i e s (see t h e f i r s t f o u r columns of Table 2 ) * .

This means t h a t t h e e x p o r t "push" ha s a s t r o n g e r e f f e c t on t r a d e

f lows t h a n t h e import " p u l l " , which i s i n accordance w i t h t h e

expe r i ence of t r a d e r s and t h e f i n d i n g s o f t h o s e i n v e s t i g a t i n g

t r a d i n g a c t i v i t i e s . I t i s most u n f o r t u n a t e t h a t t h i s a s p e c t o f

t h e problem should have been s o complete ly n e g l e c t e d by most

g l o b a l t r a d e modelers**.

However, it i s n o t e a sy t o b u i l d up a t r a d e model which

t a k e s both of t h e s e f o r c e s i n t o account . Methods which s t a r t

w i th t h e import demand by c o u n t r i e s and sum t h e s e v a l u e s u s i n g

t r a d e s h a r e m a t r i c e s t o produce e x p o r t s by c o u n t r i e s "do n o t

r e q u i r e e s t i m a t i o n o f an e x p o r t f u n c t i o n f o r each count ry . In-

deed such e x p o r t e q u a t i o n s would be redundantw-as r i g h t l y

po in t ed o u t by Rhomberg ( I 970: 10) . Unfo r tuna t e ly what i s r e -

garded h e r e a s " redundant" i s i n f a c t a t l e a s t a s impor tan t a s

t h e mechanism used t o d r i v e t h e t r a d e model, i f n o t more so .

It seems q u i t e c l e a r t h a t methods which t r y t o i gno re t h e

c o n f l i c t u a l c h a r a c t e r o f t r a d i n g a c t i v i t i e s and t h e o r i g i n a l

i n c o n s i s t e n c i e s i n h e r e n t i n them a r e n o t s u f f i c i e n t l y r e a l i s t i c .

However, it i s e a s i e r t o c r i t i c i s e t h i s approach t h a n t o o f f e r

something b e t t e r . Neve r the l e s s , c r i t i c i s m must be a b e t t e r

s t a r t i n g p o i n t f o r improvement t h a n complacency.

*This f e a t u r e has a l s o been observed i n o t h e r g r a v i t a t i o n - a l models no t p r e s e n t e d h e r e f o r methodolog ica l o r c l a s s i f i c a t i o n reasons . See Nagy (1 979) .

**There a r e n o t a b l e e x c e p t i o n s however, see, e . g . , Samuel- son (1 973 ) , I n t e r f u t u r e s (1 978) .

5 . DO TRADE BALANCES APPROACH ZERO?

I t i s w e l l known t h a t when g l o b a l models a r e extended t o i n -

c lude f i n a n c i a l and s e r v i c e f lows , d i f f i c u l t i e s a r e encounte red

due t o t h e a lmost complete absence of i n fo rma t ion on t r a n s a c t i o n s

by o r i g i n and d e s t i n a t i o n . I n c e r t a i n c a t e g o r i e s of s e r v i c e s t h e

t o t a l in - and ou t f lows by c o u n t r i e s can be e s t i m a t e d s i n c e , f o r

example, t r a n s p o r t a t i o n i s c l o s e l y r e l a t e d t o t r a d e , and t r a v e l

t o consumption. However, i n o t h e r c a t e g o r i e s , such a s c a p i t a l

f l o w s t t h e r e a r e h a r d l y any t h e o r e t i c a l f ounda t i ons on which tes t -

a b l e hypotheses concerning b i l a t e r a l f lows cou ld be based. I t

i s , however, e v i d e n t t h a t i n t e r n a t i o n a l economic r e l a t i o n s , i n -

c lud ing commodity t r a d e , a r e v e r y s t r o n g l y i n f l uenced by bo th

s e r v i c e and c a p i t a l f lows and t r a n s a c t i o n s . Waelbroeck wro te i n

1973*: " r e c e n t e v e n t s a r e w i t n e s s of t h e f o r c e s which a r e un-

l e a shed by i n t e r e s t and exchange a r b i t r a g e and d r a m a t i c a l l y mul-

t i p l i e d by s p e c u l a t i o n . " The passage of t i m e ha s s t r e s s e d t h e

d r ama t i c importance of t h e s e f a c t o r s .

Because of t h e s e d i f f i c u l t i e s , most g l o b a l models s imply

omit t h e f i n a n c i a l s e c t o r and i f t hey i n c l u d e any i n t e r n a t i o n a l

l i n k a g e , c o n s i d e r on ly commodity t r a d e . But t h e r e i s one p o i n t

a t which t h e l i n k a g e cannot be neg l ec t ed : t h e t r a d e ba l ances .

T o t a l e x p o r t s and impor t s may very w e l l be e q u a l i n each com-

modity group, w i t h t h e r e s u l t t h a t t h e n a t i o n a l e x p o r t and i m -

impor t s u r p l u s e s sum t o ze ro ; b u t t h e y a r e obv ious ly n o t ze ro .

And if we look i n t o t h e b i l a t e r a l t r a d e ba l ances t h e d i s c r e p -

a n c i e s a r e even g r e a t e r t h a n i n t h e n a t i o n a l t o t a l t r a d e

ba l ances .

Trade ba l ances a r e c l o s e l y connected w i th f i n a n c i a l and ser-

v i c e f lows: c o u n t r i e s having a h igh n e t t o u r i s t o r t r a n s p o r t a -

t i o n income u s u a l l y have a t r a d e d e f i c i t i n commodities, wh i l e

c o u n t r i e s o f f e r i n g i n t e r n a t i o n a l l o a n s o r f o r e i g n a i d u s u a l l y

have an e x p o r t s u r p l u s , t h e r e c i p i e n t s having an import s u r p l u s .

Trade ba l ances a r e u s u a l l y e s t i m a t e d exogenously i n g l o b a l

models e i t h e r a s f i x e d sums, o r a s v a l u e s l y i n g between upper

and lower l i m i t s . I n t h e s e e s t i m a t i o n s , f u t u r e f lows i n s e r v i c e s

and c a p i t a l movements a r e taken i n t o account . The balance e s t i -

mates a r e f r e q u e n t l y q u i t e low, and f o r longer t ime p r o j e c t i o n s

it isconmon t o a s s u n e a z e r o balance of t r a d e , i . e . , d e b t s cannot

accumulate i n d e f i n i t e l y . Recent alarm concerning t h e indebted-

ness of some developing c o u n t r i e s and planned economies on ly

s t r e n g t h e n s t h e a s s u m p t i o n t h a t t r a d e ba lances must even o u t over

t ime, d e b t s must be r e p a i d , import s u r p l u s e s must t u r n i n t o ex-

p o r t surpluses-except i f t h e income from t h e expor t of s e r v i c e s

o r c a p i t a l covers t h e t r a d e d e f i c i t s .

The r e s u l t s ob ta ined wi th t h e g r a v i t a t i o n a l t r a d e models

( s e e Table 2 ) however, p o i n t o u t a d i f f e r e n t p a t t e r n i n t h e

ba lance of t r a d e . I f it i s t r u e t h a t t h e f o r c e s "pushing" and

" p u l l i n g " t h e t r a d e f lows a r e n o t e q u a l , w i th t h e f i r s t having a

s t r o n g e r e f f e c t than t h e second, t r a d e between two c o u n t r i e s of

d i f f e r e n t s i z e s ( o r r a t h e r w i th d i f f e r e n t l e v e l s of G D P ) cannot

be balanced. Linnemann, who f i r s t po in ted t h i s o u t , wrote*:

" t h e p a t t e r n s of exp la ined t r a d e ... l e ad t o p o s i t i v e t r a d e

ba lances f o r t h e l a r g e r c o u n t r i e s and nega t ive ba lances f o r smal l

c o u n t r i e s . On t h e whole, such p a t t e r n s correspond wi th r e a l i t y -

a s fo l lows from t h e f a c t t h a t t h e parameters e s t ima ted a r e de-

r i v e d from observed d a t a . "

I f w e assume t h a t

and

where

' i j i s t h e expor t of count ry i t o count ry j

Y . , Y a r e t h e G D P s of c o u n t r i e s i and j 1 j

cio,a1,a2 a r e e s t ima ted parameters

it fo l lows t h a t

i . e . , count ry i has an expor t s u r p l u s and count ry j a t r a d e

d e f i c i t .

A s long a s we assume-and can observe- that t h e "push" and

" p u l l " a r e no t e q u a l , we must accep t t h a t t r a d e between two coun-

t r i e s of d i f f e r e n t s i z e s ( o r economic p o t e n t i a l ) cannot be i n

equ i l i b r ium. O r , p u t t i n g it t h e o t h e r way around, t r a d e can

reach equ i l i b r ium i n t h e s e c i rcumstances on ly i f t h e import

" p u l l " becomes s t r o n g e r t han t h e expor t "push". This would hap-

pen i f , f o r example, t h e world market were t o demonstra te some

s o r t of c y c l i c a l behav ior , w i th s u r p l u s e s and s h o r t a g e s cont inu-

a l l y succeeding each o t h e r . However, t h i s i s no t g e n e r a l l y t h e

case .

We could a l s o t r y t o i n t e r p r e t t h i s phenomonon by t a k i n g

G D P per c a p i t a a s an exp lana to ry v a r i a b l e , p o i n t i n g o u t t h a t it

i s n a t u r a l f o r c a p i t a l t o f low from r i c h c o u n t r i e s t o poorer

c o u n t r i e s because t h e inves tments t h e r e a r e more p r o f i t a b l e .

This n a t u r a l l y produces an expor t s u r p l u s f o r t h e r i c h (h ighe r

per c a p i t a G D P ) count ry and a d e f i c i t f o r t h e poorer (lower per

c a p i t a G D P ) count ry . But i f we have two c o u n t r i e s of d i f f e r e n t

s i z e s w i th s i m i l a r per c a p i t a G D P s , why should a r e g u l a r e x p o r t

s u r p l u s develop f o r t h e b i g g e r count ry? This i s n o t a t a l l easy

t o unders tand , My computations (Nagy 1 9 7 7 ) showed t h a t i n t h e

m a j o r i t y of c a s e s t h e r e i s a s t r o n g c o r r e l a t i o n between t h e

t o t a l G D P and t h e per c a p i t a G D P , and a s a consequence we f i n d

t h a t c o u n t r i e s w i th h igh G D P s a r e u s u a l l y a l s o r i c h .

There i s obvious ly a l o t we cannot observe , do n o t know and

a r e unable t o e x p l a i n i n t h e i n t e r n a t i o n a l f i n a n c i a l f low and

i n v i s i b l e t r a d e system. However, one t h i n g i s c e r t a i n : t h e as -

sumption t h a t t r a d e ba l ances must be a t o r near ze ro i s s imp l i s -

t i c and u n r e a l i s t i c , even i n t h e long run .

6 . THE ROLE OF PRICES

One of t h e most fundamental hypotheses of t r a d e modeling i s

t h a t r e l a t i v e p r i c e s a r e t h e major de te rminants of t r a d e f lows.

The usua l p o i n t of d e p a r t u r e i s t o assume t h a t t r a d e f lows , o r

import s h a r e s , a r e f u n c t i o n s of r e l a t i v e p r i c e s , where t h e p r i c e s

charged by t h e d i f f e r e n t e x p o r t e r s a r e compared wi th t h e weighted

average pa id i n t h e given import market*. The expor t p r i c e s

a r e u s u a l l y r ep l aced by t h e domestic p r i c e s charged i n t h e ex-

p o r t i n g count ry and i t is assumed t h a t impor te rs can i n c r e a s e

t h e market sha re of t h e s u p p l i e r s o f f e r i n g lower p r i c e s w i th a

c e r t a i n e l a s t i c i t y of s u b s t i t u t i o n .

These assumptions a r e even more pronounced i n t h e optimiza-

t i o n o r g e n e r a l equ i l i b r ium models used f o r f o r e c a s t i n g o r plan-

ning purposes . I n t h e s e models, w i t h i n c e r t a i n market l i m i t a -

t i o n s , goods a r e ob ta ined on ly from t h e lowest p r i c e s u p p l i e r s ,

whi le p r i c e s a r e such a s t o c l e a r t h e markets.

The i d e a t h a t impor te rs a r e mainly concerned wi th buying a t

t h e lowest p o s s i b l e p r i c e and t h a t expor t p r i c e s a r e c l o s e l y r e -

l a t e d t o domestic c o s t s i s s o s t r o n g l y embedded i n t h e c o l l e c t i v e

subconscious of t r a d e modelers t h a t it is perhaps never ques t ioned

i n t h e l i t e r a t u r e . However, i t i s no t a t a l l obvious t h a t i m -

p o r t e r s have a f r e e choice among e x p o r t e r s , nor t h a t t r a d i n g

t r a n s a c t i o n s a r e based on some s o r t of " c o s t p l u s p r i c i n g " prac-

t i c e .

From a t h e o r e t i c a l s t a n d p o i n t , itseems e v i d e n t t h a t i f t h e r e

i s p e r f e c t compet i t ion f o r a g iven commodity on t h e world market

( i n o t h e r words, i f t h e r e i s a world marke t ! ) , t hen p r i c e s can

d i f f e r only because of t r a n s p o r t a t i o n c o s t s ; t h u s , i f we d i s r e -

gard t h e s e , t h e r e a r e no r e l a t i v e p r i c e s and s o they cannot be

t h e d r i v i n g f o r c e behind changes i n market sha re s . A v a r i e t y of

p r i c e s i n t h e t r a d e of a homogenous commodity i n d i c a t e s market

imper fec t ions , i . e . , t h e l ack of p e r f e c t compet i t ion.

- --

*This f a i r l y d r a s t i c s i m p l i f i c a t i o n of a Walrasian t r a d e model i s assumed t o be r e q u i r e d t o g e t an e m p i r i c a l l y managable system. See, f o r example, Armington ( 1 969) , Hickman ( 1 973) , Nyhus ( 1 975) , Whalley ( 1 980) , F i l a t o v e t a l . ( 1 980) , hish hi do ( 1 980) , I n t e r f u t u r e s ( 1 978) .

"Cost p l u s p r i c i n g " i s presumably more t h e except ion than

t h e r u l e i n e x p o r t p r i c e format ion. Changing comparative advan-

t a g e s work through changing c o s t d i f f e r e n c e s and p r o f i t margins.

The assumption of a unique p r o f i t r a t e and p a r a l l e l changes i n

c o s t s and p r i c e s (with no corresponding changes i n t h e p r o f i t

r a t e ) seems t o be un tenable i f it i s g e n e r a l i z e d .

The i d e a t h a t impor te rs choose t h e " b e s t o f f e r " made by t h e

producers ( e x p o r t e r s ) i s c l o s e l y r e l a t e d t o t h e concept c r i t i -

c i z e d above, i . e . , t h a t demand determines t r a d e f lows. I f we

accep t t h a t supply p l a y s a t l e a s t an e q u a l l y impor tan t r o l e , we

may j u s t a s w e l l assume t h a t t h e e x p o r t e r s choose t h e i r markets

on t h e b a s i s of t h e " b e s t o f f e r " made t o them. I n t h i s ca se

t r a d e would be d r iven no t by t h e lowes t , b u t by t h e h i g h e s t

p r i c e s o f f e r e d o r ob ta ined . I n f a c t , bo th t endenc ie s can be ob-

served i n t h e i n t e r n a t i o n a l t r a d e game: impor te rs a r e looking

f o r cheap s u p p l i e r s ( i n t h e c e t e r i s p a r i b u s case ! ) and e x p o r t e r s

f o r h igh ly p r i c e d markets and bo th of them a r e t r y i n g t o a d j u s t

t h e i r purchases and s a l e s accord ing ly . No one-sided approach

can cap tu re o r s imu la t e t h e complexity of t h i s m u l t i f a c e t e d pro-

c e s s .

The t h e o r e t i c a l soundness of t h e assumption t h a t r e l a t i v e

p r i c e s e x e r t an important i n f l u e n c e upon t h e expor t performance

of competing c o u n t r i e s has a l r eady been ques t ioned some 20 y e a r s

ago by S t e r n and Zuprick ( 3 9 6 2 ) , who concluded on t h e o r e t i c a l

grounds t h a t

... t h e r e i s no reason t o b e l i e v e t h a t t h e observed p r i c e r e l a t i v e s , computed from recorded in format ion a v a i l a b l e , a c c u r a t e l y r e f l e c t t h e p r i c e d i f f e r e n t i a l s which a r e i n fact r e s p o n s i b l e f o r t h e changes observed i n t h e expor t market s h a r e s . This i s because t h e a c t u a l p r i c e s of s u b s t i t u t a b l e goods move i n sympathy wi th one ano the r ... The observed p r i c e d a t a r e f l e c t t h e outcome of t h e oper- a t i o n of market f o r c e s , and t h u s do no t r e v e a l t h e impact p r i c e d i f f e r e n t i a l s which s e t t h e s e f o r c e s i n t o motion (pp. 581-583).

A s tudy of p r i c e format ion and p r i c e d i f f e r e n c e s i n prac-

t i c e r e v e a l s a g r e a t v a r i e t y of outcomes, which seem t o depend

on t h e commodity involved and t h e market cond i t i ons . A t one ex-

treme it i s p o s s i b l e t o f i n d commodities i n which t h e e x p o r t e r s

have a complete monopoly s o t h a t a l l impor t e r s have t o pay t h e

same p r i c e ( p l u s t r a n s p o r t , a t i o n c o s t s ) . A t t h e o t h e r end of t h e

s c a l e a r e t h e c o m p e t i t i v e impor t marke t s , where p r i c e s a r e homog-

enous w i t h r e s p e c t t o t h e o r i g i n o f t h e goods*. But more common

t h a n e i t h e r of t h e s e i s t h e s i t u a t i o n i n which p r i c e s a r e d i f f e r -

e n t i a t e d f o r a g r e a t number of r e a s o n s , b o t h f o r t h e e x p o r t e r s

s e l l i n g i n d i f f e r e n t markets and f o r t h e impor t e r s buying from

d i f f e r e n t s o u r c e s . Th i s i s t h e most f r e q u e n t outcome of t h e ba r -

g a i n i n g p r o c e s s , which i s n a t u r a l l y i n f l u e n c e d by a l l k inds of

l o c a l and temporary phenomena.

Price c o n s i d e r a t i o n s a r e impor t an t , b u t r e p r e s e n t o n l y one

o f many a s p e c t s which i n f l u e n c e t h e p r o t a g o n i s t s i n t h e ba rga in -

i n g p roce s s . Another i s t h e q u a l i t y of t h e p roduc t , which o f

cou r se can be e v a l u a t e d i n many d i f f e r e n t ways, w i t h t h e r e s u l t

t h a t t h e r e i s u s u a l l y a broad sp r ead of a s s e s smen t s and o p i n i o n s

a s t o how d i f f e r e n c e s i n q u a l i t y can be compared w i t h d i f f e r e n c e s

i n p r i c e . I n a d d i t i o n t o t h e measurable d i f f e r e n c e s i n q u a l i t y

( t h e t e c h n i c a l p a r a m e t e r s ) , t h e b u y e r ' s conf idence i n t h e c o n s i s -

t ency of t h e q u a l i t y i s a l s o ve ry impor t an t , e s p e c i a l l y when

c r i t i c a l u se s a r e involved**. The i n i t i a l q u a l i t y e v a l u a t i o n

and t h e con f idence of t h e buyer can be g r e a t l y i n f l u e n c e d by ad-

v e r t i z e m e n t , promotion, and o t h e r marke t ing t e chn iques . These

a r e t h e a r e a s i n which most of t h e e x p o r t "push" t a k e s p l a c e .

Other , non-pr ice f a c t o r s which may have some e f f e c t on

t r a n s a c t i o n s a r e p r e s a l e a d v i c e , a f t e r - s a l e s e r v i c e , c r e d i t

terms, speed o f d e l i v e r y , o f f i c i a l o r p r i v a t e buy-domestic p o l i -

c i e s , government t r a d e d i r e c t i v e s , e t c . *** Then, of cou r se ,

t r a n s p o r t a t i o n c o s t s ( i n c l u d i n g i n s u r a n c e , customs, and e x t r a

packing c h a r g e s ) t a r i f f s and a c t u a l exchange r a t e s p l a y a r o l e

i n p r i c e fo rmat ion . The r e s u l t i s t h a t when l ook ing a t a p r i c e ,

it i s ex t remely d i f f i c u l t t o t e l l how much of it i s due t o phys i -

c a l d i f f e r e n c e s i n q u a l i t y , how much t o s e r v i c e a s p e c t s , and how

much t o t h e i n e f f i c i e n c y of t h e t r a d i n g p a r t n e r s .

*Gulbranson (1982) g i v e s t h e example o f c e r e a l s f o r t h e f i r s t c a s e and t r o p i c a l p r oduc t s and m e t a l s f o r t h e second (Appendix 111) .

**See Krav i s and L ipsey (1971:31-43). ***See Krav i s and L ipsey (1971:47-48).

One should also not lose sight of the fact that the set of

factual prices is much smaller than that of offered prices.

All offers other than that finally accepted are only potential

prices, not actual prices. As a consequence it is very difficult

to tell how far actual prices are from the "best offer".

If it cannot be assumed that observable prices are closely

related to costs, we could take up the old suggestion that costs

would be better measures of competition than are prices*. If,

for example, export prices adjust to changed conditions more

quickly than costs, then cost comparisons may reflect the causes

for shifts in the flows of trade more clearly than price differ-

entials. The higher the elasticity of substitution between pro-

ducts of different countries, i.e., the greater the number of

buyers changing from one source to another in response to rela-

tive price changes, the more likely it is that changes in com-

petitiveness will be reflected in adjustments in quantity rather

than in price changes, If, in a competitive market, the prices

charged by the exporters move together, a loss (or gain) in com-

petitiveness will appear as a decline (or increase) in the

profits. The resulting change in the export share can appear

without any observable change in relative prices. But even if

competition or substitution is not perfect and there can be sub-

stantial price differences between competing exporters or pro-

ducts (as in several manufacturing sectors), it is still not pos-

sible to tell how far these differences may be attributed to

variations in quality and how far to differences in costs.

It may well be that relative costs are theoretically better

indices of competitiveness than prices, but they also have sev-

eral comparative disadvantages. It is well known that there are

various methods of allocating production costs to specific com-

modities, when, for example, several different commodities are

made at the same plant or are produced by the sane process.

Furthermore, it is much more difficult to obtain information

about costs than about prices, and the concept of price is less

likely to vary significantly from one reporter to another.

*See McDougal (1951, 1952), Stern (1962).

Never the l e s s , it seems c l e a r e r t o c o n c e n t r a t e on d i f f e r e n c e s

i n c o s t s and t h e i r e v o l u t i o n s over t i m e when l i n k i n g n a t i o n a l

models t o g e t h e r , and t o r e g a r d t h e s e c o s t d i f f e r e n c e s a s t h e

f o r c e s caus ing market s h a r e s t o change. Cost d i f f e r e n c e s and

t h e i r e v o l u t i o n can be t r a c e d back t o t h e f a c t o r s a f f e c t i n g c o s t s .

Na t iona l models shou ld focus on t h e s e f a c t o r changes i n o r d e r t o

p rov ide r e l e v a n t i n fo rma t ion f o r t h e t r a d e l i n k a g e p r o c e s s . But

one should a l s o avo id t r e a t i n g t h i s r e l a t i o n s h i p m e c h a n i s t i c a l l y :

it i s n o t neces sa ry f o r t h e c o s t of t h e o u t p u t t o f o l l o w t h e

changes i n t h e i n p u t c o s t s . L e i b e n s t e i n (1981) drew a t t e n t i o n

t o t h e importance of changes i n e f f i c i e n c y , which can s t r o n g l y

i n f l u e n c e t h e r e l a t i o n s h i p of changes i n i n p u t c o s t s t o changes

i n o u t p u t c o s t s . H e wrote*

There i s no neces sa ry r e l a t i o n s h i p between t h e pe rcen t age i n c r e a s e i n c o s t s o f i n p u t s ( l a b o r , raw m a t e r i a l s , mach- i n e r y , e t c . ) and t h e pe rcen t age i n c r e a s e of c o s t s of out - p u t . The c o s t o f t h e o u t p u t can t u r n o u t t o be v e r y much s m a l l e r , o r n o t r i se a t a l l .

7 . THE OBSERVATION OF PRICES

So f a r w e have d i s c u s s e d t h e r o l e of p r i c e s i n t r a d e , mak-

i n g t h e b a s i c assumption t h a t p r i c e s can be observed. Now w e

s h a l l c o n s i d e r t h e e x t e n t t o which t h i s i s a c t u a l l y t r u e .

I n p r a c t i c e t h e a v a i l a b l e f o r e i g n t r a d e p r i c e i n fo rma t ion

i s ex t remely poor and u n r e l i a b l e . A l l w e c an u s u a l l y o b t a i n

from f o r e i g n t r a d e s t a t i s t i c s a r e u n i t v a t u e s , i . e . , t h e v a l u e s

of an i n d i v i d u a l i t e m i n a p a r t i c u l a r commodity c l a s s a s r e p o r t -

ed by e x p o r t e r s o r impor t e r s t o t h e custom a u t h o r i t i e s . S i n c e

t h e s e c l a s s i f i c a t i o n s (whether t hey be n a t i o n a l c a t e g o r i e s o r

t h e s t a n d a r d I n t e r n a t i o n a l Trade C l a s s i f i c a t i o n s ) have t o cover

a l l p o s s i b l e t y p e s of commodities, they canno t be d e f i n e d i n a

ve ry d e t a i l e d way. The consequence i s t h a t one never knows f o r

s u r e what a change i n u n i t v a l u e s r e a l l y means: i s it a p r i c e

change o r a s h i f t from a p roduc t of one q u a l i t y o r type t o

ano the r? U n i t v a l u e s a r e t h e weighted average p r i c e s of t h e

goods w i t h i n one p roduc t ca tegory and can be a l t e r e d by changes

i n t h e we igh t s , o r i n t h e p r i c e s , o r i n bo th . I t happens occa-

s i o n a l l y t h a t t h e u n i t v a l u e s move i n t h e o p p o s i t e d i r e c t i o n t o

t h e changes i n p r i c e s : f o r example, i f t h e e x p o r t s t r u c t u r e moves

toward b e t t e r , h i g h e r - q u a l i t y p roduc t s (which a r emore e x p e n s i v e ) ,

t h e u n i t v a l u e s may i n c r e a s e even i f t h e p r i c e s of a l l i t e m s wi th-

i n t h e commodity ca t ego ry a r e dec rea s ing .

I n i n t e r n a t i o n a l t r a d e models w e a r e less i n t e r e s t e d i n t h e

c u r r e n t l e v e l o r h i s t o r i c a l e v o l u t i o n of p r i c e s o r u n i t v a l u e s ,

than i n t h e i r r e l a t i v e movements i n d i f f e r e n t c o u n t r i e s . But a s

t h e i n t e r n a l s t r u c t u r e of e x p o r t s and impor t s w i t h i n each com-

modity c l a s s v a r i e s w i t h c o u n t r y , " i t i s n o t p o s s i b l e t o say

whether an appa ren t change i n p r i c e r e l a t i o n s r e s u l t s from d i f -

f e r e n c e s i n p r i c e movements o r from d i f f e r e n c e s i n t h e weigh t ing

of i d e n t i c a l p r i c e movements"-as Kravis and Lipsey haveobserved* .

One can a l s o assume a r e l a t e d s y s t e m a t i c change i n t h e composi-

t i o n of e x p o r t s : commodities f a c i n g s e v e r e f o r e i g n c o m p e t i t i o n ,

o r whose compe t i t i venes s i s d e c l i n i n g , t end t o dec rea se i n impor-

t a n c e w i t h i n t h e commodity c l a s s o r t o d i s appea r a l t o g e t h e r ; a s

a consequence t h e r e l a t i v e p r i c e ( o r u n i t v a l u e ) i n d i c e s a r e i n -

capab le of r e f l e c t i n g t h e d i f f e r e n t i a l s of compe t i t i venes s t hey

a r e in tended t o show.

The obvious d e f i c i e n c i e s of u n i t va lue i n d i c e s have l e d

modelers and t r a d e a n a l y s t s t o adopt domest ic wholesa le o r indus-

t r i a l s e l l i n g p r i c e s i n s t ead** . These i n d i c e s have a g r e a t ad-

van tage over u n i t v a l u e s because they a r e u s u a l l y c o n s t r u c t e d

from t h e p r i c e s o f c a r e f u l l y s e l e c t e d commodities. For t h i s

reason t h e weight ing problem does n o t a r i s e a t t h e l e v e l of t h e

i n d i v i d u a l p roduc t s , appear ing on ly when t h e s e p roduc t p r i c e i n -

d i c e s a r e aggrega ted t o r e p r e s e n t t h e changes i n p r i c e of a com-

modity group o r o f an i n d u s t r i a l s e c t o r . Consequently, even i f

n a t i o n a l p r i c e i n d i c e s a r e a c c u r a t e i n d i c a t o r s of t h e change i n

a c o u n t r y ' s economy, they a r e inadequa te measures of i n t e r n a t i o n a l

p r i c e compet i t iveness . The n a t i o n a l i n d i c e s a r e a l l q u i t e d i f -

f e r e n t i n terms of coverage, we igh t ing , and methods of computat ion.

- -

*Kravis and Lipsey ( 197 1 : 5) . **See, e . g . , t h e Appendix i n Nyhus (1975) .

The assumpt ion t h a t domest ic p r i c e d i f f e r e n t i a l s o r changes

i n t h e s e d i f f e r e n t i a l s a r e r e s p o n s i b l e f o r changes i n market

s h a r e s i s based on t h e i n h e r e n t b e l i e f t h a t e x p o r t p r i c e s ( o r

o f f e r s ) a r e e q u a l , o r a t l e a s t c l o s e l y r e l a t e d , t o domes t i c p r i -

ces. But i f economies a r e n o t comple te ly open and markets n o t p e r -

f e c t l y comlpeti t ive ( a s i s u s u a l l y t h e c a s e i n p r a c t i c e ) , domes t i c

and e x p o r t p r i c e s do n o t have t o be e q u a l , o r move i n p a r a l l e l .

Domestic p r i c e s a r e b a s i c a l l y determined by domes t i c economic

c o n d i t i o n s , wh i l e t h e s e c o n d i t i o n s p l ay a much less i m p o r t a n t ,

even n e g l i g i b l e r o l e on t h e wor ld marke t , where e x p o r t p r i c e s

a r e determined. There can be a boom a t home, s o t h a t i n d u s t r i e s

may r a i s e t h e i r domes t i c p r i c e s , whi le a t t h e same t i m e i n t e r n a -

t i o n a l compe t i t i on r e s t r a i n s them from i n c r e a s i n g t h e i r e x p o r t

p r i c e s . The o p p o s i t e can of cou r se a l s o occur . Bes ide t h e d i f -

f e r e n c e s between domes t i c and i n t e r n a t i o n a l market c o n d i t i o n s ,

a g r e a t number of o t h e r f a c t o r s can a l s o r e s u l t i n d i f f e r e n c e s

between e x p o r t and domes t i c p r i c e s ; t h e s e i n c l u d e t r a n s p o r t a t i o n

c o s t s , government r e g u l a t i o n s , t a r i f f s , s u b s i d i e s , and t a x ex-

emptions.

I t may w e l l be t h e c a s e t h a t w h o l e s a l e o r i n d u s t r i a l s e l l i n g

p r i c e s a r e b e t t e r measures of i n t e r n a t i o n a l p r i c e compe t i t i venes s

t han u n i t v a l u e s , which e x p l a i n s why t hey a r e p r e f e r r e d i n model-

i n g , a l though w e have t o a g r e e w i t h Kravis and Lipsey (1971) t h a t

they a r e a l s o ve ry u n r e l i a b l e . But t h e argument g iven i n t h e

p r ev ious c h a p t e r i s n o t concerned w i t h t h e s t a t i s t i c a l d e f e c t s of

t h e a v a i l a b l e p r i c e d a t a . W e a r e b a s i c a l l y i n agreement w i t h

S t e r n and Zupnick* t h a t "even i f it were p o s s i b l e t o wash t h e

d a t a c l e a n , observed p r i c e r a t i o s would s t i l l have no exp l ana to ry

s i g n i f i c a n c e " f o r i n t e r n a t i o n a l t r a d e f l ows , o r changes i n market

s h a r e s .

8 . THE STRUCTURE OF INTERNATIONAL TRADE AND THE ROLE OF TRADE POLICY AND DISTANCE

W e have a l r e a d y s een t h a t t h e g l o b a l models which i n c l u d e

b i l a t e r a l t r a d e f lows u s u a l l y t r e a t them i n a r a t h e r s imple

*S t e rn and Zupnick (1962:591).

way-they e i t h e r assume a c o n s t a n t t r a d e p a t t e r n t aken from p a s t

o b s e r v a t i o n s o r a d j u s t t h i s p a t t e r n accord ing t o changes i n r e l a -

t i v e p r i c e s w i t h a g iven e l a s t i c i t y , making a l lowances f o r a c e r -

t a i n degree of economic i n e r t i a .

Ques t ions such a s how t h e s t r u c t u r e of i n t e r n a t i o n a l t r a d e

changes over t i m e , what f a c t o r s i n f l u e n c e t h i s change, and how

it can be measured have n o t r e c e i v e d much a t t e n t i o n ; t h e l i m i t e d

r e s u l t s of t h e few s t u d i e s a t t emp t ing t o answer t h e s e q u e s t i o n s

have a s y e t n o t been wide ly i n c o r p o r a t e d i n g l o b a l modeling work*.

When d e a l i n g w i t h t h e s t r u c t u r e s of t r a d e f l ows , structures

of shares a r e t h e most f r e q u e n t l y ana lyzed q u a n t i t i e s . These

s t r u c t u r e s a r e g e n e r a l l y sets of we igh t s g l , g 2 , . . . , g n f o r which

n and

S e v e r a l s t r u c t u r e s of t h i s t y p e may be c o n s t r u c t e d from i n t e r n a -

t i o n a l t r a d e f l ows , a cco rd ing t o what w e c o n s i d e r t o be t h e

" t o t a l " of which t h e s h a r e s form a p a r t .

I n p r a c t i c e , impor t s h a r e s a r e most f r e q u e n t l y used.

Neg lec t ing t h e breakdown by commodit ies , t h e impor t s h a r e index

a l e a d s t o a sys tem of s t r u c t u r a l c o e f f i c i e n t s o f dimension n 2 i j

w i t h columns t h a t sum t o u n i t y :

where

'ij i s t h e e x p o r t of coun t ry i t o coun t ry j

X i s t h e t o t a l impor t of coun t ry j . j

E v i d e n t l y , t h e a i j impor t s h a r e s can be used t o c o n s t r u c t a t a b l e

of t r a d e f l ows , p rov ided t h a t t h e v a l u e of t o t a l impor t s ( X e i ) J

*See P u l l i a i n e n ( 1 9 6 3 ) , Tinbergen ( 1 9 6 2 ) , Linnemann ( 1 9 6 6 ) , ECE (1971a, 1 9 7 3 ) , Nagy (1971, 1972, 1 9 7 9 ) , Ai tken ( 1 9 7 3 ) , Johansson and Persson ( 1982) .

is given. This, of course, also yields total exports by coun-

tries, since

Moreover, the difference between the export and import totals

gives the total trade balance, as well as the bilateral trade

balance :

The degree of freedom of a structure determined by the

import share coefficients is n, the number of countries in the

system. This means that when each column contains one positive

element all flows can be unequivocally determined and the whole

table of trade flows can be completed.

The distribution of exports by countries may be obtained in

a similar way:

Using the above idea of degrees of freedom, we can define "equiv-

alent" or "subordinated" structures in the following way*. Two

structures are "equivalent" when their degrees of freedom "n"

are equal and they satisfy the requirement that, when assigning

freely chosen values to an "n"-tuple of trade flows and insert-

ing these values into both systems, the corresponding elements

of the two flow tables are equal. A flow structure is "subordi-

nated" to another when it is more elastic (i.e., has a higher

degree of freedom) than the latter, and satisfies the requirement

that when a number of flow elements equal to the degree of freedom

*See Marin-Curtoud ( 1 965) .

of t h e more e l a s t i c system i s taken from t h e more r i g i d system

and i n s e r t e d i n t o t h e e l a s t i c one, then t h e corresponding e l e -

ments of t h e two flow t a b l e s a r e equal .

I t may be seen t h a t t h e s t r u c t u r e s genera ted by a i j and B i j

a r e n o t e q u i v a l e n t i n t h e above sense , d e s p i t e t h e i r s i m i l a r i t y

and t h e f a c t t h a t they have t h e same degree of freedom. How-

e v e r , it may be shown t h a t bo th s t r u c t u r e s a r e s u b o r d i n a t e d t o

t h e s t r u c t u r e

i . e . , t o t h e s t r u c t u r e d e s c r i b i n g t h e t r a d e f lows a s p a r t s of

t o t a l world t r a d e ( X . . ) . The degree of freedom of t h i s s t r u c -

t u r e i s one, i . e . , it i s much more r i g i d than t h e o t h e r s . The

t h r e e types of s h a r e s a r e c l o s e l y r e l a t e d t o one ano the r :

X . . =A=

Xi 9

I t fo l lows from t h i s t h a t s h a r e s t r u c t u r e s o f t y p e a o r B a r e s u b o r d i n a t e d t o a c e r t a i n Z s t r u c t u r e , and t h e y may be con-

s i s t e n t o n l y i f t h e y a r e e q u i v a l e n t t o t h e same Z s t r u c t u r e . By

cons i s tency w e mean t h a t t h e r e e x i s t s a system of t r a d e f lows

s a t i s f y i n g both s h a r e s t r u c t u r e s a and B . The degree of freedom

of t h e c o n s i s t e n t a and B s t r u c t u r e s i s no t " n u , b u t one, a s

they a r e e q u i v a l e n t t o t h e Z s t r u c t u r e w i th t h i s degree of f r e e -

dom.

These s t a t emen t s s e e m t o be s e l f - exp lana to ry b u t , a s we

s h a l l s e e l a t e r , t hey a r e important i n p r a c t i c e , i n p a r t i c u l a r

when we have t o e l a b o r a t e c o n s i s t e n t p r o j e c t i o n s o r s c e n a r i o s

f o r t h e f u t u r e . P a s t t rade-f low d a t a a r e always c o n s i s t e n t i n

t h e s ense t h a t t h e r e i s on ly one v a l u e i n each c e l l of t h e t r a d e -

f low t ab l e : and t h e a and f3 s h a r e s t r u c t u r e s a r e c o n s i s t e n t and

e q u i v a l e n t t o t h e cor responding Z s h a r e s t r u c t u r e . When, however,

w e want t o make f o r e c a s t s , o u r model becomes more e l a s t i c o r more

r i g i d depending on t h e system of s t r u c t u r a l c o e f f i c i e n t s a p p l i e d ,

and t h i s w i l l de termine t h e cons i s t ency requ i rements w e can se t

UP

C e r t a i n t r a d e models** i n c o r p o r a t e t h e t r e n d s i n t h e s h a r e

s t r u c t u r e s b u t i n no c a s e i s t h e r e any r ea son t o p r e f e r t h e i m -

p o r t t o t h e e x p o r t s h a r e s . The i n v e s t i g a t i o n s of t h e s e c r e t a r i a t

of t h e U . N . Economic Commission f o r Europe have demonstra ted t h e

i n c o n s i s t e n c y of t h e p r o j e c t i o n s made by e x t r a p o l a t i n g t r e n d s i n

e x p o r t and impor t s h a r e s . They concluded t h a t :

Indeed , b y c o n s i d e r i n g t h e p a s t t r e n d of an e x p o r t i n g c o u n t r y ' s s h a r e i n an impor t ing c o u n t r y ' s marke t , and i n c a l c u l a t i n g t h e cor responding t r e n d , w e i n t r o d u c e i n t o t h e c a l c u l a t i o n a f a c t o r l i n k e d w i t h t h e p a s t growth of t o t a l e x p o r t s of t h e e x p o r t i n g coun t ry i n q u e s t i o n . I f t h i s import s h a r e i s p r o j e c t e d i n t o t h e f u t u r e , it i s i m p l i c i t l y assumedthatthetotalexports of t h e e x p o r t i n g count ry w i l l con t i nue t o grow a t t h e same rhythm a s i n t h e p a s t , S i m i l a r l y , i f an e x p o r t s h a r e i s p r o j e c t e d , an i m p l i c i t assumption i s made abou t t h e growth r a t e of t o t a l impor t s of t h e import- i n g count ry (ECE 1971b:52) .

Th i s r e s e a r c h n o t on ly r e v e a l e d t h e i n c o n s i s t e n c y i n t h e a p p l i -

c a t i o n of a and f3 s t r u c t u r e s and of t h e i r t r e n d s b u t a l s o l e d

t o t h e s t a t emen t :

The conc lu s ion from t h e exper iments s o f a r a t t empted t h u s seems t o be t h a t t h e import o r e x p o r t s h a r e s d o n o t , e x c e p t i n ve ry s p e c i a l c a s e s , c o n s t i t u t e good i n d i c a t o r s o f t h e i n t e n s i t y of t r a d e r e l a t i o n s be- tween a p a i r of c o u n t r i e s ; o t h e r i n d i c a t o r s must be found t o pe rmi t medium-term p r o j e c t i o n s of t h e ma t r i - ces of world t r a d e .

These expe r i ences and c o n s i d e r a t i o n s have induced s e v e r a l

r e s e a r c h e r s t o r e p l a c e impor t o r e x p o r t s h a r e s by ano the r s t r u c -

t u r a l sys tem, less one-s ided, b e t t e r s u i t e d f o r i n t e r p r e t a t i o n

and a b l e t o e n s u r e t h e cons i s t ency of p r o j e c t i o n s w i thou t a t t r i -

b u t i n g any p a r t i c u l a r importance t o e i t h e r t h e import demand o r

t h e e x p o r t supp ly .

* I f we d i s r e g a r d t r a n s p o r t a t i o n c o s t s and d i f f e r e n c e s i n o b s e r v a t i o n .

**ECE (1971b1, Nagy and Torok (1971) .

The o r i g i n s o f t h i s system a r e g e n e r a l l y t r a c e d back t o t h e

work of R. Froment and J . Zighera , f i r s t pub l i shed i n 1964*. The

development of t r a d e i n t e n s i t y ( o r " d e l t a " ) s t r u c t u r a l c o e f f i -

c i e n t s was l a r g e l y s t i m u l a t e d by t h e r e a l i z a t i o n t h a t i n d i v i d u a l

t r a d e f l o w s depend on t h e "push" o f t h e e x p o r t i n g c o u n t r y , on

t h e " p u l l " o f t h e i m p o r t i n g c o u n t r y and on t h e p a r t i c u l a r f a c t o r s

r e g u l a t i n g t h e i r b i l a t e r a l r e l a t i o n s . Thi s concep t i s c l o s e l y

r e l a t e d t o t h e i d e a s behind g r a v i t a t i o n a l models, which assume

t h a t t h e economic p o t e n t i a l and t h e s i z e of t h e domes t ic markets

g e n e r a l l y e x p l a i n t r a d e f lows , b u t t h a t some s p e c i a l f a c t o r s rep-

r e s e n t e d by d i s t a n c e and p r e f e r e n c e v a r i a b l e s a r e a l s o impor t an t .

Th is means t h a t t h e volume of t o t a l n a t i o n a l e x p o r t s and impor t s

i s determined by i n t e r n a l economic c o n d i t i o n s b u t t h a t i n d i v i d u a l

t r a d e f lows a r e a l s o shaped by f a c t o r s t h a t r e g u l a t e t h e b i l a t e r -

a l exchanges, such a s t r a n s p o r t c o s t s and t r a d e p o l i c y measures.

Th is d i s t i n c t i o n of two c a t e g o r i e s of f a c t o r s l e d t o t h e

s e p a r a t e a n a l y s i s of t h e ffvoZume e f f e c t s f f a t t r i b u t e d t o t h e econ-

omic p o t e n t i a l , i . e . , t h e "push" and " p u l l " e f f e c t s o f t h e v a r i -

ous c o u n t r i e s , and o f t h e " i n t e n s i t y e f f e c t s " which i n f l u e n c e

each t r a d e f low s e p a r a t e l y , such a s economic d i s t a n c e and t r a d e

p o l i c y r e l a t i o n s . The "volume" and " i n t e n s i t y " e f f e c t s a r e d i s -

t i n g u i s h e d i n such a way t h a t a f i c t i t i o u s , s o - c a l l e d f fnormaZf f

f l o w can be computed by t a k i n g i n t o a c c o u n t t h e volume e f f e c t s ;

t h e n , by comparing t h i s w i t h t h e c o r r e s p o n d i n g f ac tuaZ t r a d e

f l o w d a t a , t h e i n t e n s i t y e f f e c t s a r e o b t a i n e d a s a r e s i d u a l .

Disregard ing t h e d i s a g g r e g a t i o n by commodities, and deno t ing t h e

s h a r e s of t h e i n d i v i d u a l f lows i n t o t a l world t r a d e by Z , w e ob-

t a i n t h e "normaZU f l o w s ( i n d i c a t e d by a n ove rba r ) by m u l t i p l y i n g

t h e s h a r e s i n world e x p o r t s by t h e s h a r e s i n world impor t s :

For i n s t a n c e , i f t h e e x p o r t s h a r e o f count ry i i n t o t a l

world t r a d e i s 10 p e r c e n t , and t h e import s h a r e of coun t ry j i s

- - -

* I n a c t u a l f a c t t h e s e i d e a s w e r e expressed somewhat e a r l i e r by Savage and Deutsch (1960) . But t r a c e s a l s o l e a d back t o Leont ie f and S t r o u t (1963)and t o I s a r d (1956) .

20 p e r c e n t , t h e n t h e "normal" e x p o r t flow from i t o j i s 2 pe r -

c e n t . The "normal" f lows t h e r e f o r e i n c l u d e bo th t h e "push" e f -

f e c t of e x p o r t supply and t h e " p u l l " e f f e c t of import demand.

The i n t e n s i t y e f f e c t i s then ob t a ined by d i v i d i n g t h e ob-

se rved t r a d e f low s h a r e by t h e "normal" one; t h e r e s u l t i n g f i g -

u r e i s c a l l e d t h e " d e l t a " s t r u c t u r a l c o e f f i c i e n t :

The 6 c o e f f i c i e n t r e p r e s e n t s t h e e f f e c t s of a l l f a c t o r s i n f luen -

c i n g t h e t r a d e f lows between a g iven p a i r of c o u n t r i e s i n a g iven

pe r iod o f t ime , a p a r t from t h e volume e f f e c t s of t o t a l e x p o r t s

and imports . I f t r a d e p o l i c y measures, d i s c r i m i n a t i o n , i n t e g r a -

t i o n , c o l o n i a l and o t h e r h i s t o r i c a l l i n k s , d i s t a n c e , e t c . , do n o t

have a s t r o n g e f f e c t on t h e t r a d e between two c o u n t r i e s , t h e

va lue of 6 w i l l be u n i t y o r c l o s e t o it. I f , however, t h e s e fac -

t o r s cons ide rab ly reduce o r i n c r e a s e t h e t r a d e f low i n q u e s t i o n ,

t h i s c o e f f i c i e n t w i l l be lower o r h i g h e r t han u n i t y , r e s p e c t i v e l y .

I t must be emphasized t h a t a t r a d e flow of "normal" i n t e n -

s i t y r e p r e s e n t s on ly a s t a r t i n g p o i n t f o r measurement and t h a t

no n o r m a t i v e v a l u e j udgmen t s s h o u l d be a t t a c h e d t o i t . A "nor-

mallt t r a d e f low i s on ly one which i s n o t i n f l u e n c e d by t r a d e

p o l i c y , d i s t a n c e o r s i m i l a r e f f e c t s , s o t h a t i t s s h a r e i n t o t a l

world t r a d e i s equa l t o t h e p roduc t of t h e expor t i ng and import-

i ng c o u n t r i e s ' s h a r e s i n world t r a d e .

The 6 c o e f f i c i e n t s y i e l d a s t r u c t u r e of t r a d e i n t e n s i t y t h a t

does n o t depend on t h e volume of world t r a d e , nor on t h e changes

i n t h e s h a r e s of t h e i n d i v i d u a l c o u n t r i e s i n w o r l d t r a d e . To ca l cu -

l a t e t h e c o e f f i c i e n t s w e f i r s t make t h e i n d i v i d u a l f lows independent

of changes i n t h e volume o f world t r a d e (by d i v i d i n g t h e X i j t s by

X . . r t h u s o b t a i n i n g t h e Z i j l s ) ; w e t hen t a k e o u t t h e changes occur- r i n g i n t h e s h a r e s of t o t a l n a t i o n a l e x p o r t s and impor t s i n world

t r a d e (by d i v i d i n g t h e Z i j ' s by t h e c o e f f i c i e n t s Z i . and Z . 1 . j

Th i s means t h a t t h e system of c o e f f i c i e n t s i s una f f ec t ed by bo th

enduring and c y c l i c a l changes a s w e l l a s volume e f f e c t s , s o t h a t

it may be j u s t i f i a b l y considered t o be a reasonable exp res s ion

of world- t rade s t r u c t u r e .

The 6 c o e f f i c i e n t s a r e c l o s e l y r e l a t e d t o t h e s h a r e coef-

f i c i e n t s d i s cus sed above:

Thus, t h e 6 i j c o e f f i c i e n t may be ob ta ined e i t h e r by d iv id -

i n g t h e import s h a r e by t h e s h a r e of t h e t o t a l e x p o r t s of t h e

expor t ing country i n world t r a d e ; o r by d i v i d i n g t h e e x p o r t s h a r e

by t h e s h a r e of t h e t o t a l imports of t h e import ing count ry i n

world t r a d e . I t may a l s o be c a l c u l a t e d by mul t i p ly ing t o g e t h e r

t h e import s h a r e and e x p o r t s h a r e p e r t a i n i n g t o t h e same t r a d e

f low and then d i v i d i n g t h e i r product by t h e s h a r e o f t h i s f low i n

world t r a d e . The 6 c o e f f i c i e n t i s d i r e c t l y p r o p o r t i o n a l t o t h e

s h a r e c o e f f i c i e n t s and i n v e r s e l y p r o p o r t i o n a l t o t h e s h a r e s of

t o t a l n a t i o n a l imports o r e x p o r t s i n world t r a d e o r t o t h e s h a r e

of t h e given flow i n world t r a d e .

I n a d d i t i o n , t h e Z s t r u c t u r e i s equ iva l en t t o t h e s t r u c - i j

t u r e determined by t h e 6 c o e f f i c i e n t s . This equiva lence , however,

does no t mean t h a t t h e two systems of c o e f f i c i e n t s a r e i d e n t i c a l ,

o r t h a t they have t h e same informat ion va lue . I t means on ly t h a t

every 6 s t r u c t u r e corresponds t o a Z s t r u c t u r e and v i c e v e r s a ,

where t h i s correspondence r e f e r s t o t h e whole t rade-f low t a b l e ,

and does no t imply t h a t a s i n g l e def ined Z s h a r e w i l l correspond

t o a given 6 c o e f f i c i e n t .

This r e l a t i o n s h i p between t h e 6 and t h e s h a r e c o e f f i c i e n t s

throws some l i g h t on t h e economic c o n t e n t of t h e s e i n d i c a t o r s ,

a s w e l l a s on t h e assumptions on which they a r e based. We have

a l r e a d y seen t h a t t h e 6 can a l s o be expressed a s a f r a c t i o n com-

pa r ing t h e s h a r e of an expor t ing country i n an import market

w i th t h e s h a r e of t h e same e x p o r t e r i n world t r a d e :

S i m i l a r l y , it i s p o s s i b l e t o compare t h e s h a r e of an import mar-

k e t i n t h e t o t a l e x p o r t s of ano the r count ry w i th t h e s h a r e of t h e

impor te r i n t o t a l world t r a d e :

This means t h a t t h e d e l t a s t r u c t u r a l c o e f f i c i e n t s w i l l be

"normal" o r c l o s e t o u n i t y when t h e import ing r e g i o n s t r e a t a l l

e x p o r t i n g r e g i o n s i n t h e same way, i . e . , they buy up t h e same

percen tage s h a r e s from t h e t o t a l supply of each r eg ion . Simi-

l a r l y , when a l l t r a d e f lows a r e "normal", t h e t o t a l supply of

every expor t i ng coun t ry i s a l l o c a t e d among t h e import markets

accord ing t o t h e s h a r e s of t h e l a t t e r i n world t r a d e .

Another impor tan t f e a t u r e of t h e B s t r u c t u r e s i s t h a t when

t h e i r e lements a r e weighted by t h e t o t a l e x p o r t and t o t a l impor t

s h a r e s ( Z i . , Z ) , t h e weighted e lements i n each row and column j

sum t o un i ty :

and

Z n - ij

6 i j z i o - z and I 6 i j zi . = 1 . j i = l

I t a l s o fo l l ows from t h i s t h a t t h e i n v e r s e of t h e ma t r ix A of 6

c o e f f i c i e n t s when summed by rows and columns y i e l d s t h e Z s h a r e s :

and

I t i s easy t o see t h a t t h e s t r u c t u r e s determined by t h e B

c o e f f i c i e n t s and t h e Z s h a r e s bo th have a degree of freedom of

one, s o t h a t i f a s i n g l e b i l a t e r a l o r t o t a l t r a d e f low i s g iven ,

t h e whole t a b l e may be unequivoca l ly completed w i t h a b s o l u t e

va lues .

W e mentioned above t h a t a g i v e n 6 s t r u c t u r e i s " e q u i v a l e n t "

t o a c e r t a i n Z s h a r e s t r u c t u r e . A g i v e n 6 sys tem d e t e r m i n e s i j

t h e s h a r e s of t o t a l e x p o r t s and i m p o r t s ( Z and Z . ) , and when i j b o t h t h e 6 i j c o e f f i c i e n t s and t h e t o t a l e x p o r t and impor t s h a r e s

a r e g i v e n , the ' i j

f lows may a l s o be o b t a i n e d . I t h a s a l r e a d y

been demons t ra ted t h a t t h e c l o s e i n t e r r e l a t i o n o f t h e 6 s t r u c t u r e s

and t h e margins i s of g r e a t h e l p i n making p r o j e c t i o n s * .

The p a r t i c u l a r f e a t u r e o f t h e 6 s t r u c t u r e s p o i n t e d o u t above

i s v a l i d o n l y when no z e r o e s occur i n t h e d i a g o n a l of t h e m a t r i x .

Var ious methods of d e a l i n g w i t h t h i s problem have been sugges ted** .

I f r e g i o n s and n o t c o u n t r i e s a r e r e p r e s e n t e d i n t h e m o d e l , t h e

d i a g o n a l o f t h e t r a d e f low m a t r i x r e p r e s e n t s i n t r a r e g i o n a l t r a d e .

To g i v e some i d e a of t h e s i z e and e v o l u t i o n of t r a d e i n t e n s i t y

c o e f f i c i e n t s , Table 3 l i s t s a number o f t h e s e c o e f f i c i e n t s f o r

t h e main r e g i o n s of t h e world and two major commodity c l a s s e s a t

a h i g h l y a g g r e g a t e d l e v e l * * * .

A s can be s e e n from T a b l e 3 , t h e r e a r e v e r y i n t e n s i v e f l o w s

between t h e s o c i a l i s t c o u n t r i e s , mainly i n manufac tu res , b u t it

i s a l s o c l e a r t h a t t h e i n t e n s i t y o f t h i s i n t r a r e g i o n a l t r a d e i s

d e c l i n i n g o v e r t i m e w i t h a r e s u l t i n g i n c r e a s e i n t h e t r a d e w i t h t h e

o t h e r two r e g i o n s . However, t h e e x p o r t i n t e n s i t y of t h e s o c i a l -

i s t c o u n t r i e s changes a t q u i t e d i f f e r e n t r a t e s depending on t h e

commodity g roup and i m p o r t i n g r e g i o n c o n s i d e r e d . While t h e i n -

t e n s i t y o f pr imary goods e x p o r t s from s o c i a l i s t c o u n t r i e s t o t h e

o t h e r r e g i o n s r o s e n e a r l y twofo ld f o r b o t h i m p o r t i n g r e g i o n s ,

t h a t of t h e e x p o r t s of manufac tu res t o developed market economies

s t a g n a t e d between 1955-1965 and i n c r e a s e d o n l y modera te ly t h e r e -

a f t e r . The i n t e n s i t y of t h e e x p o r t of manufac tu res from s o c i a l i s t

c o u n t r i e s t o d e v e l o p i n g c o u n t r i e s r o s e a l m o s t t h r e e f o l d i n t h e

f i r s t decade , b u t s i n c e t h e n has been s l o w l y d e c l i n i n g .

The i n t e n s i t y o f e x p o r t s from d e v e l o p i n g c o u n t r i e s t o s o c i a l i s t

c o u n t r i e s i s r e l a t i v e l y low and shows a n u n f a v o r a b l e p a t t e r n o f

*See Nagy (1979 ,1982) . **See Froment and Z ighera ( 1 9 6 4 ) , ECE (1 9 7 3 ) .

***Fink (1977) has p o i n t e d o u t one o f t h e g r e a t weaknesses o f d e l t a c o e f f i c i e n t s : t h e y canno t be d i r e c t l y compared i f t h e y r e p r e s e n t c o u n t r i e s o f d i f f e r e n t s i z e s . H e s u g g e s t e d t h a t a n o t h e r i n d i c a t o r s h o u l d be used t o measure i n t e g r a t i o n . T h i s problem w i l l be d i s c u s s e d i n a fo r thcoming p a p e r by Nagy and S t a h l . See a l s o G e l e i and Kapi tany (1 982) .

V I O V I N P V I W W F P c n c n c n c n c n 7 - 7 - 7

rn : 7 4J U m w 7 C m r:

V I O V I N F V I W W F F c n c n c n c n c n 7 7 - 7 7

U n

2, n

U m

V I O V I N P V I W C D F P c n c n c n c n c n 7 7 7 7 -

5 m a, a, Llt -4 O U E 4 a, 0 - O X C W > k O r : a ,a Ua n E a,--

U

rl m c, 0 H

U n

W r: a

U m

k m a, w

tn C -4 rn c, C k 0 0 -4 Llt tn X a, W k

d e v e l o p m e n t , e s p e c i a l l y i n manufactures : though t h e e x p o r t i n t e n -

s i t y r o s e q u i c k l y between 1955 and 1965, t h e n e x t 12 y e a r s saw a

r a p i d d e c r e a s e t o a l e v e l even lower t h a n it was i n 1955.

The t r a d e i n t e n s i t i e s of developed market economies a r e v e r y

s t a b l e , p a r t i c u l a r l y f o r i n t r a r e g i o n a l t r a d e . The s t r o n g i n c r e a s e

i n t h e i n t e n s i t y of t r a d e w i t h t h e s o c i a l i s t c o u n t r i e s i s c o u n t e r -

ba lanced by a s l i g h t d e c l i n e i n t h e i n t e n s i t y o f t r a d e w i t h t h e

deve lop ing c o u n t r i e s .

The tendency of t h e i n t e n s i t y of i n t r a r e g i o n a l t r a d e between

t h e deve lop ing c o u n t r i e s t o i n c r e a s e between 1955 and 1972 was

fo l lowed by a d e c l i n e i n t h e succeed ing p e r i o d : t h e i n t e n s i t y

of t h e i n t r a r e g i o n a l t r a d e i n manufac tu res was e n c o u r a g i n g l y

s t r o n g and showed a d e f i n i t e rise i n 1955-1965, b u t it h a s s i n c e

f a l l e n back t o a lower l e v e l t h a n i n 1955.

I t i s obv ious t h a t i f w e took more d e t a i l e d g e o g r a p h i c a l and

commodity c l a s s i f i c a t i o n s , o t h e r i n t e r e s t i n g p a t t e r n s and t r e n d s

would emerge from t h e t r a d e i n t e n s i t i e s , b u t t h e examples g i v e n

above shou ld a t l e a s t g i v e some i m p r e s s i o n of t h e u s e of t h i s

t y p e of a n a l y s i s .

The r e l a t i o n s h i p between t h e t r a d e i n t e n s i t y c o e f f i c i e n t s

and t h e s h a r e s i n t o t a l t r a d e g i v e n on page 30 c a n b e r e w r i t t e n

a s :

where t h e t i l d a s i n d i c a t e t h e p e r c e n t a g e change i n t h e v a l u e of

a c o e f f i c i e n t between two p e r i o d s . Changes i n b i l a t e r a l f low

s h a r e s ( i ) can be t r a c e d back t o t h r e e f a c t o r s : t h e change i n i j

t h e t o t a l e x p o r t s h a r e of c o u n t r y i , t h e change i n t h e t o t a l

impor t s h a r e of c o u n t r y j , and how t h e i n f l u e n c e of t h e t r a d e

i n t e n s i t y f a c t o r s changed f o r t h e g i v e n t r a d e f low. Tab le 4

i l l u s t r a t e s t h e r o l e o f t h e s e f a c t o r s i n t h e changes o f b i l a t e r a l

f low s h a r e s f o r t h e t h r e e a g g r e q a t e r e g i o n s c o n s i d e r e d e a r l i e r .

The l a s t column ( Z i . ) and l a s t row (Z ) show how t h e t o t a l ex- * i

p o r t and impor t s h a r e s o f t h e r e g i o n s ;hanged o v e r t h e p e r i o d s

1961-1972 and 1973-1977. The t a b l e c o n t a i n s two i n d i c e s f o r - e a c h f low: t h e f i r s t shows t h e

' i j v a l u e s , i . e . , t h e

Table 4 . F a c t o r s caus ing change i n r e g i o n a l t r a d e f lows, 1961- 1972 and 1973-1977, a s percen tages .

- -- -

Importing r eg ions

Export ing SC DME - DC - - - .- - - r eg ions Per iod ' i j ' i j 6 i j z i j 6 i j z i .

S o c i a l i s t 61-72 c o u n t r i e s (SC 1 73-77

Developed -7 market economies (DME

73-77

Developing 61-72 c o u n t r i e s (DC 73-77

Note: Mul t i p ly ing t h e f a c t o r s t o g e t h e r does n o t always produce t h e quoted change i n b i l a t e r a l s h a r e s because of rounding e r r o r s .

Source: Au tho r ' s computat ion from UNCTAD (1979) .

pe rcen tage change observed i n t h e g iven f low over t h e pe r iod i n -

d i c a t e d , whi le t h e second index shows t h e corresponding changes - i n t r a d e i n t e n s i t i e s ( A i i ) .

The t a b l e shows t h a t t h e s h a r e o f t h e i n t r a r e g i o n a l t r a d e of

t h e s o c i a l i s t c o u n t r i e s i n t o t a l world t r a d e decreased. i n bo th

p e r i o d s , bu t a l though t h i s dec rease was g r e a t e r i n t h e f i r s t

p e r i o d (-25 pe rcen t compared wi th -17 p e r c e n t ) , t h e r e was a

smal l d e c l i n e i n t r a d e i n t e n s i t i e s on ly i n t h e second p e r i o d .

Trade between s o c i a l i s t and developed c o u n t r i e s i n c r e a s e d i n

bo th p e r i o d s , mainly due t o an i n c r e a s e i n t r a d e i n t e n s i t i e s

which o f f s e t t h e d e c l i n i n g world t r a d e s h a r e of t h e s o c i a l i s t

c o u n t r i e s ( i n bo th p e r i o d s ) and t h e developed economies ( i n t h e

second p e r i o d ) ..

I n t r a r e g i o n a l t r a d e between t h e d e v e l o p e d c o u n t r i e s i n c r e a s e d

i t s s h a r e by 18 p e r c e n t i n t h e f i r s t p e r i o d , t h i s d e c r e a s i n g by

17 p e r c e n t a f t e r 1972. The i n c r e a s e i n t h e f i r s t p e r i o d can b e

a t t r i b u t e d s o l e l y t o t h e r e g i o n t a k i n g a n i n c r e a s i n g s h a r e i n

wor ld t r a d e ; i n t h e second p e r i o d a l l t h r e e f a c t o r s c o n t r i b u t e d

t o t h e d e c l i n e .

The e x p o r t and impor t f low s h a r e s of t h e d e v e l o p i n g coun-

t r ies a l l d e c r e a s e d i n t h e 1960s, w i t h t h e e x c e p t i o n of i m p o r t s

from s o c i a l i s t c o u n t r i e s , where a n ex t remely s t r o n g i n t e n s i f i c a -

t i o n of t r a d e (84 p e r c e n t ) o f f s e t t h e d e c l i n i n g s h a r e of b o t h

r e g i o n s i n t o t a l t r a d e . I n c o n t r a s t , t h e t r a d e f low s h a r e s of

t h e d e v e l o p i n g c o u n t r i e s i n t h e second p e r i o d a l l i n c r e a s e d ,

ma in ly due t o t h e i n c r e a s e i n t h e p r i c e o f o i l and o t h e r raw

m a t e r i a l s . I n more t e c h n i c a l t e r m s t h i s happened because t h e

s h a r e of d e v e l o p i n g c o u n t r i e s i n t o t a l wor ld e x p o r t s and i m p o r t s

grew v e r y s t r o n g l y ( + 4 4 p e r c e n t and +27 p e r c e n t r e s p e c t i v e l y ) ,

w h i l e t r a d e i n t e n s i t i e s i n c r e a s e d s l i g h t l y o n l y w i t h t h e d e v e l -

oped r e g i o n s , d e c r e a s i n g e l s e w h e r e . A v e r y s p e c t a c u l a r (62

p e r c e n t ) r ise i n t h e i n t r a r e g i o n a l t r a d e of t h e d e v e l o p i n g coun-

tr ies when t h e c o r r e s p o n d i n g t r a d e i n t e n s i t y d e c r e a s e d by 1 1

p e r c e n t was p o s s i b l e o n l y because t h e s h a r e of t h e d e v e l o p i n g

c o u n t r i e s i n wor ld t r a d e was i n c r e a s i n g s o s t r o n g l y .

A s t u d y of t h e dynamics of changing t r a d e p a t t e r n s r e v e a l s

t h a t t h e f a c t o r s d i s t o r t i n g t r a d e f lows from t h e i r "normal"

s t r u c t u r e o p e r a t e s t r o n g l y on a g r e a t number of f lows and t h a t

t h e s e f a c t o r s change o v e r t i m e . These changes a r e o b v i o u s l y

r o o t e d i n t r a d e p o l i c y r a t h e r t h a n d i s t a n c e e f f e c t s because t h e

l a t t e r - e v e n t a k i n g i n t o a c c o u n t t h e e v o l u t i o n of t r a n s p o r t a t i o n

costs-do n o t change a s f r e q u e n t l y a s do p o l i c i e s . Consequent ly

t h e approaches and models which assume a c e r t a i n i n e r t i a i n p a t -

t e r n s of t r a d e a r e p r o b a b l y more r e a l i s t i c t h a n models which

a l l o w r a p i d s t r u c t u r a l changes , a l t h o u g h t h e y n e g l e c t t h e c a u s e s

of t h e s e r i g i d i t i e s and t h e i r changes i n t i m e .

To i n c r e a s e t h e r e a l i s m of t h e s e models and t h e p r o b a b i l i t y

o f making r e a s o n a b l e e s t i m a t e s ' o f f u t u r e t r a d e p a t t e r n s , one c a n

o n l y a t t e m p t t o t a k e i n t o a c c o u n t t h e i r e v o l u t i o n a r y h i s t o r y - i t

c a n n o t be assumed e i t h e r t h a t t h e y w i l l remain unchanged, o r t lxat

they will change according to any tendency observed in the past.

Most international trade projections suffer as a result of such

erroneous assumptions.

It is evident that themajor factors determining the trade

policies of various countries, such as regional integration,

liberalization and discrimination, economic neocolonialism and

struggle for independence-all of the factors which together

shape the trade intensities and structural coefficients-

will neither remain unchanged over time nor will any changes

that occur necessarily follow the directions and rates of pre-

vious changes. If the intention is to estimate the changes that

are most likely to occur in the future rather than mechanically

following some trend observed in the past, it is impossible to

avoid the rather troublesome and highly disputable procedure-

loaded with many subjective elements-of analyzing and project-

ing individual trade intensity coefficients.

A study of the past development of the factors influencing

trade intensities points to three main types of change:

(a) continuation of a previously observed course, which

can mean either the continued stability of the coef-

ficient in question, or the continuation of its

observed trend;

(b) a "flattening-out" of the previously observed trend,

where, under the influence of various factors, the

rate of change diminishes as the coefficient ap-

proaches a certain value;

(c) a change in the previously observed level or trend

of the coefficient, due to significant changes in

trade policy or other factors, or to changes in the

relative weights of these factors.

Behind these typical changes in structural coefficients we

may observe two kinds of fundamental processes:

(1) the "normalization" of international trade, as re-

flected in coefficients approaching unity, and

(2) the integration of certain groups of countries,

which tends to increase the intraregional trade

coefficients to values above unity, and to de-

crease those of interregional trade to values

below unity.

For both processes we may observe that, as a rule, the

greater the changes the more the coefficients diverge from the

"center of attraction", which is about unity in the case of

"normalization" processes and above unity in the case of inte-

grated intraregional trade. This explains what we have called

"the flattening-out of trends": when, for instance, the 6 coef-

ficient corresponding to a flow of low intensity is increasing

towards unity, the relative rates of increase are generally

diminishing. These two types of movement are illustrated in

Figure 6. The upper part of the figure presents "normalization",

the lower part the case of regional integration, where the 6

coefficients of intraregional and interregional trade approach

different levels of attraction. In both cases, a dotted line

indicates changes of direction brought about by temporary evolu-

tion of the 6 coefficient in a direction other than the dominant

trend.

The two types of movement can cross and overlap one another.

For instance, the tendency toward "normalization" restrains the

growth of intraregional trade, while enhancing interregional

trade. Conversely, the tendency toward integration acts against

"normalization", forcing the structural coefficients to deviate

from unity. These two tendencies, presented separately here,

are often mixed together in practice, leading to a kind of com-

promise, i.e., to a "weighted average" of their effects.

The "normalization" of world trade may be attributed to a

change in the political relations and trade policies of various

countries over the past 25-30 years. Considerable progress has

been made in eliminating the trade restrictions introduced in

the early 1930s, strengthened by World War 11, and encouraged

by the subsequent cold-war atmosphere. The liberalization of

trade, the reduction of tariffs, the restored convertibility of

"Integration"

Figure 6. Typical changes in the 6 coefficients over time .

a number of c u r r e n c i e s , t h e development of East-West t r a d e , and

d e c o l o n i z a t i o n were t h e main f a c t o r s a c t i n g towards "normal iza-

t i o n " . The changes i n t h e i n t e n s i t y .of t r a d e f lows r e f l e c t some

s p e c t a c u l a r achievements i n t h i s f i e l d , b u t t h e y a l s o r e v e a l t h e

scope f o r f u r t h e r improvement. U n f o r t u n a t e l y , however, t h e re-

c e n t economic r e c e s s i o n and t h e r e s u l t i n g r e v i v a l of p r o t e c t i o n -

i s t measures have g e n e r a l l y slowed down t h e p r o c e s s of "normal-

i z a t i o n " , and have a c t u a l l y r e v e r s e d it i n c e r t a i n a r e a s .

One consequence of t h e r e o r g a n i z a t i o n and r e a l i g n m e n t of

n a t i o n s d u r i n g t h i s c e n t u r y was t h e f o r m a t i o n o f v a r i o u s p o l i t i -

c a l l y and economica l ly i n t e g r a t e d g roups o f c o u n t r i e s . The i n -

t e n s i f i c a t i o n of t r a d e w i t h i n t h e s e r e g i o n s can b e t r a c e d t o a

l a r g e number of c a u s e s , and it would be i n c o r r e c t t o e x p l a i n it

s imply by i n t e g r a t i o n ; it would be even more e r r o n e o u s t o con-

s i d e r t h e i n c r e a s e i n i n t e n s i t y a s a measure of i n t e g r a t i o n . It

i s , however, unden iab ly t r u e t h a t a v a s t r ea r rangement o f p o l i t i -

c a l and economic r e l a t i o n s h a s t a k e n p l a c e . i n t h e l a s t decades :

t h e economic community o f s o c i a l i s t c o u n t r i e s was c r e a t e d , t h e

economic i n t e g r a t i o n of West European c o u n t r i e s advanced cons id -

e r a b l y , t h e economic r e l a t i o n s of former c o l o n i e s w e r e s i g n i f i -

c a n t l y t r a n s f o r m e d , Japan and more r e c e n t l y t h e newly i n d u s t r i -

a l i z e d c o u n t r i e s of A s i a emerged a s major e x p o r t e r s of manufac-

t u r e s - a l l of t h i s h a s c h a n g e d t h e i n t e n s i t y of t r a d e f lows among

c o u n t r i e s and r e g i o n s . One of t h e advan tages of t h e 6 c o e f f i -

c i e n t s i s t h a t t h e y reveal t h e o v e r a l l e f f e c t o f t h i s m u l t i f a c e t e d

p r o c e s s , t a k i n g i n t o accoun t a h o s t of d i f f e r e n t f a c t o r s w i t h a

v a r i e t y of economic consequences .

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